Accounting Standards- A New Move To Compliance: Defining ‘Small And Medium Sized Company’ (SMC)
On 23rd June, 2021, the Ministry of Corporate Affairs (MCA) has come with the rules pertaining to Accounting Standards. The rules got the green signal and became final and published in the Official Gazette on same day i.e. June 23, 2021. The rules are named as Companies (Accounting Standards) Rules, 2021.
Going forward to some important definitions under the aforesaid rules. It includes the following:
> “Enterprise” means a ‘company’ as defined in clause (20) of section 2 of the Companies Act, 2013;
The one of the most important and historic definition as specified in Rule 2(e):
> “Small and Medium Sized Company” (SMC) means, a company-
| (i) whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India; |
| (ii) which is not a bank, financial institution or an insurance company; |
| (iii) whose turnover (excluding other income) does not exceed two hundred and fifty crore rupees in the immediately preceding accounting year; |
| (iv) which does not have borrowings (including public deposits) in excess of fifty crore rupees at any time during the immediately preceding accounting year; and |
| (v) which is not a holding or subsidiary company of a company which is not a small and medium-sized company. |
Explanation- For the purposes of this clause, a Company shall qualify as a Small and Medium Sized Company, if the conditions mentioned therein are satisfied as at the end of the relevant accounting period.
As depicted above and interpretation of above definition, the Small and Medium Sized Company (SMC) means an unlisted Company (may be private or public) which is not a bank/ financial institution or an insurance Company whose turnover and borrowings doesn’t exceed INR 250 Crore and INR 50 Crore respectively and the Company should not be a holding or subsidiary of a Company which is not a SMC.
Please note that the conditions defined u/r 2(e) are not mutually exclusive, thus a Company needs to be complied each condition in letter and spirit to be admitted under the ambit of SMC.
> Specificity of Accounting Standards(AS): In Rule 3, the Central Government specifies Accounting Standards 1 to 5, 7 and 9 to 29 as recommended by the Institute of Chartered Accountants of India, which are specified in the Annexure to the rules. The following table indicates the AS Number along with its name:
| AS No. | Name of Accounting Standard |
| 1 | Disclosure of Accounting Policies |
| 2 | Valuation of Inventories |
| 3 | Cash Flow Statements |
| 4 | Contingencies and Events Occurring After the Balance Sheet Date |
| 5 | Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies |
| 7 | Construction Contracts |
| 9 | Revenue Recognition |
| 10 | Accounting for Fixed Assets |
| 11 | The Effects of Changes in Foreign Exchange Rates |
| 12 | Accounting for Government Grants |
| 13 | Accounting for Investments |
| 14 | Accounting for Amalgamations |
| 15 | Employee Benefits |
| 16 | Borrowing Costs |
| 17 | Segment Reporting |
| 18 | Related Party Disclosures |
| 19 | Leases |
| 20 | Earnings Per Share |
| 21 | Consolidated Financial Statements |
| 22 | Accounting for taxes on income |
| 23 | Accounting for Investments in Associates in Consolidated Financial Statements |
| 24 | Discontinuing Operations |
| 25 | Interim Financial Reporting |
| 26 | Intangible Assets |
| 27 | Financial Reporting of Interests in Joint Ventures |
| 28 | Impairment of Assets |
| 29 | Provisions, Contingent Liabilities and Contingent Assets |
> Accounting period on which these rules will apply: All the accounting periods commencing on or after the 1st day of April, 2021.
> Obligation to comply with Accounting Standard: Rule 4 enumerates that every Company, other than the Companies on which IND AS are applicable, needs to comply with the Accounting Standards and the Auditors shall also comply with the Accounting Standards in the manner specified in the Annexure. The Accounting Standards shall be applied in the preparation of Financial Statements.
> Qualification for exemption or relaxation in respect of SMC: The RULE 5 provides the criteria for enjoying the exemption or relaxation by a SMC. It qualifies that an existing company, which was previously not a SMC subsequently becomes a SMC, shall not be qualified for exemption or relaxation in respect of Accounting Standards available to a SMC until such Company remains a SMC for two consecutive accounting periods.
> Disclosure requirements by SMC:
The SMC which does not disclose certain information pursuant to the exemptions or relaxations given to it shall disclose (by way of a note to its financial statements) the fact that it is an SMC and has complied with the Accounting Standards insofar as they are applicable to an SMC on the following lines:
“The Company is a Small and Medium Sized Company (SMC) as defined in the Companies (Accounting Standards) Rules, 2021 notified under the Companies Act, 2013. Accordingly, the Company has complied with the Accounting Standards as applicable to a Small and Medium Sized Company.”
Where a non SMC becomes SMC, it should maintain its SMC status for a consecutive two accounting periods, else it will not be able to be admitted itself under the ambit of definition of SMC specified under rule 2(e).
Where a SMC becomes Non SMC, it should immediately stop availing the exemptions or relaxations which is provided only to a SMC. Also, such Company should state this fact in its financials by way of notes. The figures for the corresponding period of the previous accounting period need not be revised merely by reason of its having ceased to be an SMC. The fact that the company was an SMC in the previous period and it had availed of the exemptions or relaxations available to SMCs shall be disclosed in the notes to the financial statements.
Opting NO exemption, If an SMC opts not to avail of the exemptions or relaxations available to an SMC in respect of any but not all of the Accounting Standards, it shall disclose the standard(s) in respect of which it has availed the exemption or relaxation.
Opting Partial exemption, The SMC may opt for availing certain exemptions or relaxations from compliance with the requirements prescribed in an Accounting Standard: Provided that such a partial exemption or relaxation and disclosure shall not be permitted to mislead any person or public.
Relaxations or Exemptions provided under Accounting Standards:
Under Accounting Standard (AS) 15:
1. A Small and Medium-sized Company may not comply with paragraphs 11 to 16 of the Standard to the extent they deal with recognition and measurement of short-term accumulating compensated absences which are non-vesting (i.e., short-term accumulating compensated absences in respect of which employees are not entitled to cash payment for unused entitlement on leaving).
2. A Small and Medium-sized Company may not discount contributions that fall due more than 12 months after the balance sheet date.
3. A Small and Medium-sized Company may not apply the recognition and measurement principles laid down in paragraphs 50 to 116 in respect of accounting for defined benefit plans.
However, such company should actuarially determine and provide for the accrued liability in respect of defined benefit plans as follows:
- The method used for actuarial valuation should be the Projected Unit Credit Method; and
- The discount rate used should be determined by reference to market yields at the balance sheet date on government bonds as per paragraph 78 of the Standard.
4. A Small and Medium-sized company may not apply the presentation requirements laid down in paragraphs 117 to 118 of the Standard in respect of accounting for defined benefit plans.
5. A Small and Medium-sized company may not apply the disclosure requirements laid down in paragraphs 119 to 123 of the Standard in respect of accounting for defined benefit plans. However, such company should disclose actuarial assumptions as per paragraph 120(l) of the Standard.
6. A Small and Medium-sized Company may not apply the recognition and measurement principles laid down in paragraphs 129 to 131 of the Standard in respect of accounting for other long-term employee benefits. However, such a company should actuarially determine and provide for the accrued liability in respect of other long-term employee benefits as follows:
-
- The method used for actuarial valuation should be the Projected Unit Credit Method; and
- The discount rate used should be determined by reference to market yields at the balance sheet date on government bonds as per paragraph 78 of the Standard.
7. A Small and Medium-sized Company may not discount amounts that fall due more than 12 months after the balance sheet date.
Under Accounting Standard (AS) 15:
This Accounting Standard is not mandatory for Small and Medium Sized Companies, as defined in the Notification. Such Companies are however encouraged to comply with the Standard.
Under Accounting Standard (AS) 19:
1. A Small and Medium Sized Company may not comply with subparagraphs (c), (e) and (f) to paragraph 22 which deals in disclosures for finance leases.
2. A Small and Medium Sized Company may not comply with subparagraphs (a), (b) and (e) to paragraph 25 which deals in disclosures for operating leases.
3. A Small and Medium Sized Company may not comply with subparagraphs (a) and (f) to paragraph 37 which deals in disclosures for finance leases.
4. A Small and Medium Sized Company may not comply with subparagraphs (b) and (d) to paragraph 46 which deals in disclosures for operating leases.
Under Accounting Standard (AS) 20:
This Accounting Standard is mandatory for all companies. However, disclosure of diluted earnings per share (both including and excluding extra- ordinary items) is not mandatory for Small and Medium Sized Companies, as defined in the Notification. Such companies are however encouraged to make these disclosures.
Under Accounting Standard (AS) 28:
1. For SMC, the definition of the term ‘value in use’ would be different.
2. If a Small and Medium-Sized Company chooses to measure the ‘value in use’ as per the proviso to paragraph 4.2 of the Standard, such an SMC need not disclose the information required by paragraph 121(g) of the Standard.
Under Accounting Standard (AS) 29:
A Small and Medium-sized Company may not comply with paragraph 66 and 67 which deal with Disclosures.
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Disclaimer: This article contains interpretation of the Act, Rules, Regulations and personal views of the author are based on such interpretation. Readers are advised either to cross check the views of the author with the Act or seek the expert’s views if they want to rely on contents of this article. I assume no responsibility therefore. This is only a knowledge sharing initiative and author has no intention to solicit any business or profession.
About Author: The above has been compiled by CS. Varun Kapoor, proprietor of V Kapoor & Associates, Practicing Company Secretary from Rohini, New Delhi and Faridabad. For any queries or suggestions, he can be approached at pcsvarunkapoor@gmail.com or 9899110705.
Source: Companies (Accounting Standards) Rules, 2021.
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