The Companies Act 2013 introduced provisions related to fulfillment of Corporate Social Responsibility by certain companies (net worth Rs. 500 crores or more; or Turnover Rs. 1000 crores or more; or Net Profit of Rs. 5 crores or more) by making certain eligible expenditures/ payments. Once companies cross the threshold limit for CSR, they are required to spend at least 2% of their average net profits of 3 preceding years in eligible CSR activities. Also, there are certain major changes in CSR provisions introduced by the government in the year 2019 & 2020 but they are not notified yet. The major issues involved in accounting for CSR which will be discussed in this article are as follows:
General Recognition & Measurement criteria
The CSR Activities are carried out by companies in any of the following three ways:
Any amount spent on CSR activities through option (a) or (b) is recognised as expense in Statement of Profit & Loss immediately when they are incurred.
When companies undertake CSR activities on their own [option (c) above], we need to check the nature of expenditure i.e., whether the expenditure is of revenue nature or capital nature. If expenditure is of revenue nature then it is charged to Statement of Profit & Loss. On the other hand, if expenditure is of capital nature then verify whether the control of asset remains with the company or it has been transferred. If control of the asset has been transferred, then charge expense to Statement of Profit & Loss. However, if the company retains the control of the asset, examine whether any future economic benefits would accrue to the company. Since, as per Rule 6 of the Companies (CSR) Rules, 2014 any CSR Surplus cannot be included in business profits, therefore, amount needs to be taken to Statement of Profit & Loss in this case also.
CSR Expenses are measured at aggregate of amount actually spent/paid and amount for which contractual liability has been incurred (benefits received but payment not made as on date).
Treatment of Unspent CSR Amount
The Board of Directors shall ensure that amount required to be spent on CSR is actually spent as intended. If the company fails to do so then the unspent amount needs to be disclosed in Board’s Report specifying the reasons for such failure. [2nd Proviso to section 135 (5)]
Also, the Board Report shall include Annual Report on CSR. (Rule 8)
Now, the question arises that whether any provision is required to be made for such unspent amount or not? As such no provision is required to be made for unspent amount of CSR and only a disclosure is required to be made. However, provision needs to be made when a liability has been incurred by entering into contract for CSR spend.
The amount of provision will be equal to the amount representing the extent to which CSR activity was completed during the year.
A complete overhaul is proposed in the treatment of unspent amount; however, such provisions are yet to be notified by the government. After the amendment, we need to classify that whether unspent amount relates to an Ongoing Project or is related to other than Ongoing Project. If it is related to other than ongoing project, then the amount needs to be transferred to a fund specified in Schedule VII within 6 months from the end of financial year (i.e., upto 30 September).
On the other hand, if the unspent amount relates to an ongoing project then transfer unspent amount to a Special Account opened in the name of company within 30 days from the closure of financial year (i.e., upto 30 April). This account shall be called as ‘Unspent CSR Account’. The amount remaining in this account should be utilized within 3 years from the date of transfer on the ongoing project to which it relates. If unable to utilize within 3 years then transfer to a fund specified in Schedule VII within 30 days after completion of 3 years.
For example, ABC Ltd. has unspent CSR amount on 31st March 2021 of Rs. 500 crores which relates to an ongoing project. Now, ABC Ltd. shall open Unspent CSR Account with the bank and transfer Rs. 500 crores in that account upto 30th April 2021. Let say it transferred amount on 29th April 2021 in the account and now it has to utilize this amount upto 28th April 2024 failing which the remaining amount will have to be transferred to fund specified in Schedule VII such as PM Cares Fund or PM National Relief Fund, etc.
Treatment of Excess CSR Amount
If the company spends amount on CSR in excess of the 2% of average profits of past 3 years then it is free to do so as 2% is minimum amount and there is no maximum limit prescribed in law. However, no set-off will be allowed in subsequent years for excess amount spend in previous years and accordingly no asset should be recognised in books for such amount.
For instance, R Ltd. spends Rs. 800 crores on CSR in FY 20-21 which is equal to 2.8% of its average profits. However, in FY 21-22 it spends Rs. 560 crores which is 1.5% of its average profits. Now, R Ltd. cannot set-off excess 0.8% of FY 20-21 with deficit of 0.5% on FY 21-22.
Similar to overhaul of unspent amount, a major change is also proposed in treatment of excess CSR spend wherein companies will be allowed to set-off excess amount in future years and accordingly asset will be recognised in books of accounts equivalent to such excess. However, these provisions are yet to be notified.
Measurement of CSR spend made in kind
This includes activities such as free distribution of goods produced by the entity. These should be measured in accordance with the AS-2/ Ind AS 2 at cost or net realisable value, whichever is lower.
Treatment of Surplus arising out of CSR Activities
Any surplus arising out of CSR Projects shall not form part of business profits of a company. Also, the CSR Policy of the company shall state this. [Rule 6(2)]
Since, such surplus cannot form part of business profits but it is an income of the company (not arising from transaction with owners) which has to be recognised in Statement of Profit & Loss. So, corresponding to income a liability will also be recognised for CSR expense which will be expensed off in future period.
Presentation & Disclosure Requirements
As per General Instructions for Preparation of Financial Statements in accordance with Schedule III of the Companies Act 2013, the amount of CSR expenditure should be disclosed by way of note to the Statement of Profit & Loss.
For better financial reporting practices create a separate line item for CSR Expenditure in Statement of Profit & Loss.
A company may be in losses but still qualify for CSR spend due to net worth or turnover limit. In such cases a disclosure would be made in Board’s Report.
Following disclosure are required in notes to account of CSR expenditure:
1. Gross Amount required to be spent.
2. Amount approved by the Board.
3. Amount spent during the year on
4. Details of Related Party Transactions (Trust/ society/ section 8 company which is controlled by company for making CSR spend)