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Accounting for corporate social responsibility

CA Amrita Chattopadhyay 
on 10 August 2020

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Requirement as per S.135 of Companies Act, 2013

Section 135 of the Companies Act, 2013 requires the Board of Directors to constitute a Corporate Social responsibility Committee for the following companies:

a. Company having a net worth of Rs. 500 crores or more
b. Turnover of Rs. 1000 crores or more
c. Net profit of Rs. 5 crores or more

Activities of Corporate Social Responsibility Committee

1. It has to formulate and recommend to the Board, the Corporate Social Responsibility Policy. The policy shall indicate the activities to be undertaken by the Board. These activities should be as per the areas/subjects specified under Schedule VII of the Companies Act, 2013.

Note: Ministry of Corporate Affairs (MCA) No. 21/2014, Notification dated October 24, 2014 and clarification by MCA on COVID activities and contribution to PM cares fund.

2. The Board has to further ensure that company spends at least 2% of the average net profits of the company made during three immediately preceding financial years.

Note: The profit for the above purpose would be calculated as per Section 198 of Companies Act, 2013

Recognition and Measurement of CSR expenditure in the financial statement

Expenditure made in Cash

Expenditure made in Kind

The expenditure on the CSR activities is required to be disclosed only in the Board's report in accordance with the Rules mentioned. If there is any unspent amount during the year, the Board is free to decide whether it has to be carried forward to next year. However, if the company has undertaken CSR activity by undertaking any contractual obligation, it has to be recognized as liability in the financial statement.

The company may incur the CSR expenditure in kind as well. However, it has to be verified whether the expenditure incurred is as per Schedule VII of Companies Act.

For example, if company acquires goods and distributes the same as CSR project, it will be considered as CSR spend if it is not in the normal course of business. A hospital rendering free medical services to 25% of its patients as per local guidelines may not be considered as CSR spent.

Rule 8(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, prescribes that the Board Report of a company under these Rules shall include an Annual Report on CSR, containing particulars specified in the Annexure to the said Rules.

 

The above position has however changed after amendment made to Section 135 by Companies (Amendment) Act 2019. As per the above amendment, the unspent amount has to be transferred to a specific fund within a period of 6 months from the expiry of the financial year. However, the amendment is not applicable in case of ongoing projects.

 

CSR in respect of "Ongoing Project"

In case the company has undertaken any project to comply with CSR within the areas/subjects specified under Schedule VII of Companies Act, 2013 and the amount is unspent during the financial year for the ongoing project, the unspent amount shall be transferred to a special account opened by the company in any scheduled bank as "Unspent Corporate Social Responsibility Account" within a period of 30 days from the end of the financial year.

The amount which is transferred to Unspent Corporate Social Responsibility Account has to be spent within a period of three financial years from the date of such transfer. If the amount could not be spent within a period of three years, the unspent amount has to be transferred to specific fund as mentioned in Schedule VII within a period of 30 days from the expiry of the financial year.

Provision of liability has to be created out of the contractual obligation for ongoing project & other than ongoing projects, to the extent to which CSR activity was completed during the year. The amount transferred to a separate bank account will be the full unspent amount but the provision created will be based on the contractual obligation.

Status of the excess amount spent on a Project

In case the company spends more than 2% of the requisite amount for CSR expenditure, whether such amount can be set off subsequently. Clarification has been issued in General Circular No. 01/2016 dated 12.01.2016 that the excess amount spent for CSR activities cannot be carried forward to subsequent years and adjusted against the CSR expenditure. In view of the law and clarification given in FAQ, no asset should be recognized for the amount which is spent in excess of 2% as per the provisions of CSR activities.

However, 3rd proviso to sub-section (5) of Section 135 of the Act is being proposed to be inserted through Companies (Amendment) Ordinance 2020 to provide that if the company spends excess amount than the proposed 2%, such excess amount can be carried for such number of succeeding financial years and in such manner as may be prescribed. If the company decides not to carry forward such expenses spend in full or part, the same to the extent not carried forward has to be recognized as expense.

Recognition of Income earned from CSR projects

The term 'surplus' ordinarily means excess of income over expenditure pertaining to an entity or activity. A question generally arises whether the surplus generated from the CSR activity would be considered in the statement of profit or loss of the company. Rule 6 (2) of the Companies (Corporate Social Responsibility Policy)Rules, 2014, requires that "the surplus arising out of the CSR projectsor programs or activities shall not form part of the business profit of a company". 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. Thus, any surplus arising from the CSR project shall be recognized in the statement of profit or loss and since this surplus cannot be part of business profits of the company, the same should immediately be recognized as liability for CSR expenditure in the Balance Sheet and charge to the profit & loss account accordingly.

Accounting for corporate social responsibility

The notes relating to CSR expenditure should contain the following:

(a) Gross amount required to be spent by the Company during the year

(b) Amount approved by the Board to be spent during the year

(c) Amount spent during the year on:

 

i) Construction/acquisition of any asset
ii) On purpose other than (i) above

If the proposal of Section 135 (5) and 135 (6) are accepted, disclosure may also be required to be provided for unspent amount and the excess spent amount.

Where the CSR expenditure being goods is incurred in kind, the same should be measured as per Accounting Standard- 2 'Valuation of Inventories' / Ind AS-2 'Inventories' at lower of cost and net realizable value. Where the CSR expenditure being services is incurred in kind, the same should be measurable and recorded at cost i.e. no profit /loss.

Source: Technical guide for Accounting for expenditure on Corporate Social Responsibility Activities

 

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