Introductions: CSR which stands for Corporate Social Responsibility is a mode for corporate entities to give back to the society they are functioning in for the welfare of the same. In India, CSR was introduced first time in Section 135 of Companies Act, 2013. After that law related to CSR has been undergone some changes. Along with the amendments made to the Act in 2019, Section 135 has also been modified significantly. This articles briefs about recognition, measurement, presentation and disclosure of expenditure on activities relating to corporate social responsibility in the financial statements.
Recognition & Measurement of CSR Expenditure:
As per Section 135(5) of Companies Act 2013,
“The Board of every company which meets the limits prescribed under Section 135(1) shall 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.
If the company fails to spend such amount, the Board shall, in its report made shall specify the reasons for not spending the amount and, unless the unspent amount relates to any ongoing project referred transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year”.
Further, a company may decide to undertake its CSR activities 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 by the company,
(c) in any other way e.g. on its own
From the above it can be inferred that the accounting related to CSR may take shapes of following scenarios: –
- Spent Amount
- Contributed to Fund
- Through Registered Entity
- On its Own
- Unspent Amount
- Contributed to Fund
- Marked for ongoing projects
For accounting purpose, the above scenarios can be classified to two parts one is where CSR Activities are carried by company of its own and second one is any other case. Let’s discuss accounting in each part.
Accounting in a Scenario Where CSR Activities Carried by Company of its own: –
- 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 Guidance Note Issued by ICAI CSR Expenditure Accounting.
- In case the expenditure incurred by the company is of such nature which may give rise to an ‘asset’. As per the Framework for Preparation and Presentation of Financial Statements issued by the ICAI “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”. Hence, in cases where the control of the ‘asset’ is transferred by the company, e.g., a school building is transferred to a managing body of school for running and maintaining the school, 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 as and when incurred.
- 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 recognized 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 AS 2, Valuation of Inventories or Ind-AS 2 “Inventories”. The services rendered should be measured at cost. Non-refundable indirect taxes (i.e. GST) on the goods and services so contributed will also form part of the CSR expenditure.
- Where a company receives a grant from others for carrying out CSR activities, the grant may be treated as “Grant Related to Income” as per Ind-AS 20 “Accounting for Government Grants and Disclosure of Government Assistance. Such Government grants shall be recognized in statement of profit or loss on a systematic basis over the periods in which the entity recognizes as CSR Expenses. Same Accounting treatment need to be followed by companies preparing their financial statements as per AS (Accounting Standards).
Accounting in other Scenarios: –
- 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 amount is spent through registered entities the same will also be treated as expense for the year by charging off to the statement of profit and loss.
- In case unspent CSR amount contributed 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 unspent CSR amount is related to Ongoing Projects, the same would be accounted based on the nature of such project.
Recognition and Measurement of Income Earned During the Course of Conduct of CSR Activities: –
- The Framework for Preparation and Presentation of Financial Statements issued by the ICAI, defines ‘income’ as “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”. 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.
Presentation and Disclosure in Financial Statements of CSR Expenditure:
The General Instructions for Preparation of Statement of Profit and Loss under Schedule III (Both Division I & II)to the Companies Act, 2013, requires that in case of companies covered under Section 135, 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.
As per Guidance Note on Accounting of CSR Expenditure “The notes to Financial Statements may disclose followings with regard to CSR:
(a) Gross amount required to be spent by the company during the year.
(b) Amount spent during the year on:
||Yet to be Paid in Cash
||Construction/acquisition of any asset
||On other purposes
(c) Details of related party transactions, e.g., contribution to a trust controlled by the company in relation to CSR expenditure as per AS 18 or Ind-AS 24.
- Ind-AS 37 “Provisions, Contingent Liabilities and Contingent Assets”
- AS 29 “Provisions, Contingent Liabilities and Contingent Assets”
- Guidance Note on Accounting for Expenditure on Corporate Social Responsibility Activities issued by ICAI.
- Ind-AS 20 “Accounting for Government Grants and Disclosure of Government Assistance”
- AS 12 “Accounting For Government Grants”
- Companies Act ,2013
By- CA,CS Abinash Parida, D-IFRS (ACCA,UK), NCMP,IBBI Registered Valuer
Other Contributories to this article Anchal Agarwal, Shubhamjit Patro & Rohit Sahu.