Section 135 of the Companies Act 2013 lays down the provisions for corporate social responsibility (CSR). The Companies which come within the ambit of Section 135 are required to spend at least 2% of the average net profits every financial year on activities as defined in Schedule VII to the Companies Act.
To assist with the accounting of the expenditure on CSR activities, the Institute of Chartered Accountants of India (ICAI) issued a Guidance Note on May 15, 2015 titled “Guidance Note on Accounting for Expenditure on Corporate Social Responsibility Activities”.
Ordinarily, expenditure on CSR activity is to be charged to statement of profit and loss based on it occurrence and no provision is required to be created for the expense to be incurred. In exceptional circumstances, the treatment will be different.
To be more precise and specific, in this article, we have summarized the treatment prescribed by Corporate Social Responsibility Rules, 2014 as well as guidance note on accounting for CSR expenditure.
1. Schedule VII to the Companies Bill, 2013 specifies a list of CSR activities. The accounting will be done as under:
- 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 Company incurs any expenditure on any of the activities as per Schedule VII on its own, the company needs to analyze the nature of the expenditure keeping in mind the “Framework for Preparation and Presentation of Financial Statements issued by ICAI.
In cases, where an expenditure incurred on any of the activities mentioned in Schedule VII, is of revenue nature, 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’, the company needs to analyze whether the expenditure qualifies the definition of the term ‘asset’ as per the Framework i.e. whether it has control over the asset and derives future economic benefits from it.
2. CSR rule no 4(2) provides the option to company to undertake CSR activities through a registered trust or a registered society or a company established under Section 8 of the 2013 Act 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. In such case also, same will also be treated as expense for the year by charging off to the statement of profit and loss.
3. Where goods manufactured by the Company or services rendered by it are supplied as CSR Activities, 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.
- CSR expenditure to include the Indirect taxes (like excise duty, service tax, VAT or other applicable taxes) on the goods and services so contributed
4. Where a company receives a grant from others for carrying out CSR activities, the CSR expenditure should be measured net of the grant.
5. In course of conduct of CSR Activities or any CSR programme or project, some surplus might arise. In this respect:
- Rule 6 (2) of the CSR Rules, 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.
- Guidance note recommends in light of Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies that the surplus arising from CSR activities is to be considered as ‘income’ for accounting purposes. But since it does not arise out of ordinary course of business, 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 computation of the limit of 2% of the average net profits.
6. In case, the Company fails to spend the minimum specified 2% of the average net profits during any financial year, no provision is to be created in light of proviso to Section 135 (5) to the Act for the shortfall. Only, the reasons for shortfall should be disclosed in the Directors’ Report.
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.
7. In case, a company spends more than the 2% limit in a particular year, the excess amount spent cannot be carried forward to subsequent years for set off against the CSR expenditure required to be spent in future.
Presentation and Disclosure in Financial Statements
1. 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. (Item 5 (A)(k) of the General Instructions for Preparation of Statement of Profit and Loss under Schedule III to the Companies Act, 2013)
2. The guidance note recommends:
- All expenditure on CSR activities, that qualify to be recognised as expense 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’.
- 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.
- The notes to accounts relating to CSR expenditure should also contain the following :
- Gross amount required to be spent by the company during the year.
- Amount spent during the year on:
|CSR Activities||In cash||Yet to be paid in cash||Total|
|(i)||Construction/acquisition of any asset|
|(ii)||On purposes other than (i) above|
- Disclosure to be made by in the notes to the cash flow statement, (where applicable)
- Details of related party transactions, e.g. contribution to a trust controlled by the company in relation to the CSR expenditure as per AS 18, Related Party Disclosures.
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