prpri Updated definition of Small and Medium companies in Accounting Standard Updated definition of Small and Medium companies in Accounting Standard

A greater flexibility to wider set of Companies

Short Summary:

The ministry of corporate affairs (MCA) has notified The Companies (Accounting Standards) Amendment, Rules 2021 on 23rd June 2021. These Rules came into effect from 23rd June 2021.

Short Summary:

The ministry of corporate affairs (MCA) has raised the threshold turnover and borrowing limits in its definition of small and medium companies (SMCs) to align the applicable accounting standards rules with the latest definition as per the ministry of micro, small & medium enterprises.

This would enable a wider set of companies to avail of greater flexibility in the accounting standards.

OLD Definition:

Small and Medium-Sized Company (SMC) as defined in Clause 2(f) of the Companies (Accounting Standards) Rules, 2006: (f) “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 rupees fifty crore in the immediately preceding accounting year;

(iv) which does not have borrowings (including public deposits) in excess of rupees ten crore 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 clause (f), 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.

New Definition:

The 388-page notification has defined small and medium companies as :

(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 rupees Two Hundred fifty crore in the immediately preceding accounting year;

(iv) which does not have borrowings (including public deposits) in excess of rupees Fifty crore 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.

*SMC which is a holding company or subsidiary company of a non-SMC will not qualify as a small and medium company,

Benefits of New Definition:

a. Less complexity in application of Accounting Standard in terms of the number of required disclosures

b. To promote ease of doing business.

Applicability of New Definition:

The notification also says that an existing company which was not a small and medium company previously but became so subsequently would not be able to avail of any exemptions in accounting standards.

“It can avail of these exemptions if it continues as a small and medium company for two consecutive accounting periods.”

CONCLUSION:

The limits are in line with a similar increase in threshold done by ICAI for non-corporate entities. The revised criteria will help a number of companies and will promote ease of doing business,

The increase in turnover and borrowing thresholds for classification into the category of SMC for certain exemptions in application and disclosure of accounting standards is a welcome step.

*****

Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).

Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

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