Frequently Asked Question on Accounting for amounts to be
incurred towards Corporate Social
Responsibility (CSR) pursuant to the Companies (Corporate Social Responsibility Policy) Amendment
Rules, 2021
This FAQ has been issued by the Accounting Standards Board of the Institute of Chartered Accountants of India.
Question : On January 22, 2021, the Ministry of Corporate Affairs notified
the Companies (Corporate Social
Responsibility Policy) Amendment
Rules, 2021. Pursuant
to the amendment rules,
companies are required to spend the required amount (2% of average net profits
of the company made during the three immediately preceding financial years)
in every financial year for Corporate
Social Responsibility (CSR) activities as prescribed under schedule VII or transfer the unspent amount of ongoing projects in a special account
called Unspent CSR Account within 30
days of the end of financial year for use within a period of three financial years from the date of such transfer
(with the balance
unspent out of such account
at the end of the three financial years to be
transferred to a Fund specified in Schedule VII, within a period of thirty days from the date of
completion of the third financial year); or transfer unspent amount not relating
to ongoing projects to
such funds as mentioned in Schedule VII like Clean Ganga
Fund or PMNRF etc. within 6 months
of the end of financial year.
What
is the effect of these amendments on the accounting of amounts to be incurred
towards CSR?
Response: Section 135 of the Companies Act, 2013 lays down the requirements
pertaining to CSR of a company.
Ø Section
135(1) lays down requirement for constituting a CSR committee by a company which meets either of the three criteria
viz., net worth, turnover and net profit in the immediately preceding
financial year.
Ø Section 135(4)
requires the Board of Directors of a company
to ensure that the activities as included in CSR
Policy of the company are undertaken by the company.
Ø Section 135(5)
requires the Board of Directors of every company
referred to in sub-section
(1)
to ensure that the company spends
in every financial year, at least two per cent of the average net profits of the company made during the three
immediately preceding financial years
or where the company has not completed the period of three financial years
since its incorporation, during
such immediately preceding financial years, in pursuance of its CSR Policy.
Every company
to which Section 135 is applicable is required to spend a minimum amount
on CSR activities during the
financial year and if not spent, an explanation by the Board of Directors
specifying the reasons for not spending such amount in that financial
year is to be given, in the Directors
report. The amendment to section 135 on 22nd Jan 2021, now requires companies to additionally deal with the
unspent amount as at the end of the financial year in a stipulated manner by transferring the same to specified accounts
(Unspent CSR Account
or
Fund
specified in Schedule VII, as applicable) depending upon the fact whether such
unspent amount relates to ongoing project(s)
or not.
Specific
penal provisions have also been inserted by the amendment if the company makes default in complying with the minimum
amount required to be spent on CSR activities or the treatment of the
unspent amount, if any.
The issue is analysed below with reference to Companies (Indian
Accounting Standards) Rules,
2015:
Ind
AS 37, Provisions, Contingent Liabilities
and Contingent Assets, defines liability and obligating event and explains past event as under:
Liability
“A liability is a present obligation of the entity
arising from past events, the settlement of which
is expected to result in an outflow from the entity of resources embodying
economic benefits.
Obligating event
“An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation.”
Past event
“17. A past event that leads
to a present obligation is called an obligating event.
For an event to be an obligating event, it is necessary that the entity
has no realistic alternative to settling the obligation
created by the event. This is the case only:
(a)
where the settlement of the obligation can be enforced
by law; or
(b)
in the case of a constructive obligation, where the
event (which may be an action of the entity)
creates valid expectations in other parties that the entity will discharge the obligation.”
The
obligating event arises as the CSR activities (spend/incur) are undertaken
during the financial year in
accordance with the CSR Policy and CSR projects approved by the Board of Directors of the company, and on the
determination of the unspent amount as at the end of the financial year whether relating to ongoing projects or not,
duly considering the following requirements of Section 135:
Ø the
spend of two percent of average net profits of immediately preceding three
years, represents the measurement basis
for determining the minimum amount to be spent on CSR activities during the financial
year;
Ø the “unspent
amount”:
o of ongoing projects is to be transferred to
a special account called Unspent CSR Account
within 30 days of the end of financial year (emphasis supplied) for use within
a period of three financial years from the date of such transfer (with the balance
unspent out of such account
at the end of the three financial
years to be
transferred to a Fund specified in Schedule VII, within a period of thirty days from the date
of completion of the third
financial year); and
o
not
relating to ongoing projects is to be transferred to such funds
as mentioned in Schedule VII like Clean Ganga Fund or PMNRF
etc. within 6 months of the end of financial year (emphasis supplied).
Thus,
the obligating events requiring recognition of CSR expenditure (and a
liability, as applicable) occur as
follows:
(a)
during the financial
year, when carrying
on CSR activities (spending/incurring);
(b)
at end of the financial year, to the extent of the
“unspent amount” relating to:
(i) ongoing projects and (ii) other than ongoing
projects.
Accordingly,
CSR expenditure would be recognised as expense in the statement of profit or loss as and when such expenditure is incurred on the CSR activities undertaken as per the Board approved CSR Policy and CSR projects
during the financial year. For the “unspent amount”,
a legal obligation arises to
transfer to specified accounts depending upon the fact whether such unspent amount relates to ongoing projects
or not. Therefore, liability needs to be recognised for such “unspent amount” as at the end of
the financial year as per
para 17(a) of Ind AS 37.
Further
as per Ind AS 34, Interim Financial
Statements, CSR obligation will be recognised based on the
principles for recognition of the same
in annual financial statements.
Provisions relevant for the
instant issue under AS 29, Provisions Contingent Liabilities and Contingent Assets, and AS 25, Interim
Financial Statements, are similar to Ind AS 37 and Ind AS 34, respectively. Accordingly, conclusions drawn above
equally apply under Companies (Accounting Standards) Rule, 2006 also.
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