Section 135 of the Companies Act, 2013 (Act) deals with the provisions of Corporate Social Responsibility (CSR) andrequires every company that comes under the purview of the mandatory spend to spend on CSR in that financial year. There is no provision under the Act to provide for a provision for CSRfor amounts that are not spent, but surprisingly there is a provision in note 8 of the Guidance note on Accounting for expenditure on Corporate Social Responsibility Activities (Guidance Note) issued by ICAI to make a provision, that allows the auditor to create a provision for CSR in case the amount is not spent on CSR in the current financial year. Thus from a requirement of a line item in the profit and loss account to be shown as “Expenditure on CSR” to a provision in accounts and an explanation in notes to accounts.
Just the spend on CSR
Every company has to spend the amount set apart on CSR and it is a commitment by the Board of Directors. From the guidance note perspective it is a line item in the accounts in the Profit & Loss account as provided in note 17 as CSR Expenditure in the Profit & loss account. This line item is for all those companies that have spent 100% of the amount allocated for CSR in that year and in the notes to accounts a mention that the amount allocated and the amount spent was the same is required to be made by the auditors. The auditor has to ensure that the amount spent on CSR falls under schedule VII of the Act; otherwise it will have to be shown under the category of donation.
Line item to paragraph
The Guidance note requires the auditor to explain the utilization of the CSR fund in several places in the financial statement that include notes to accounts, cash flow statement, under accounting standard 18 and in case of a provision the details separately. The Act casts a responsibility on the Board to report in only the Board’s Report whereas the guidance note casts a responsibility on the auditors to disclose the details in detail in so many places in the financial statement. As per note 17 auditors have to disclose in the notes to account the following details, which include:
(i) Gross amount required to be spent by the company during the year
(ii) The details of expense in case of construction or acquisition of an asset or expenditure, the information to the extent relevant, may also be made in the notes to the cash flow statement, where applicable.
(iii) Details of related party transactions, e.g., contribution to a trust controlled by the company in relation to CSR expenditure as per Accounting Standard (AS) 18, Related Party Disclosures.
(iv) Where a provision is made in accordance with paragraph 8 of guidance note the same should be presented as per the requirements of Schedule III to the Companies Act, 2013. Further, movements in the provision during the year should be shown separately.
Provision for under spend amount
Note 8 of the guidance note states that provision for amount not spent i.e. any shortfall in the amount that was expected to be spent as per the provisions of the Act on CSR activities and the amount actually spent at the end of reporting period, may be made in the financial statements.
The Act requires the CSR amount to be spent in the same year but the guidance note allows companies to make a provision for the amount unspent. It can be inferred from this provision that the amount earmarked for CSR if under spent or not spent can be spent in the coming years. Since CSR is a commitment to spend should companies make a provision to spend in the coming years?
Many leading corporate are giving a commitment to spend on CSR based on the available funds for the current year. This commitment is for the amount that is available as unspent or not spent on CSR during the year. The questions that may arise in such a situation are:
i) The cash generated in the current year is set apart in the current year for spend in the next year, does the current cash balance represent future spend, is it a misleading information for shareholder;
ii) Profit & loss account does it reflect the true position on various expenses during the year;
iii) If there is no provision created in the books to set apart the money to be spent in next year, can the company spend the money, what is the auditors’ responsibility to report;
iv) In case after giving a commitment there is not enough cash to spend in the next year due to some exigency is there a default, what is the liability of auditors after reporting?
v) Should the company keep the amount to be spent separately in a fixed deposit, for giving comfort to auditors and shareholders?
Provision for overspent amount
Note 9 of guidance note deals with over spend of CSR in current year, where a company spends more than that required under law. The issue is whether the excess amount spent is allowed to be carried forward for adjustment against amounts to be spent on CSR activities in future period. A plain reading of the provisions of the guidance note indicates that the company cannot set off any excess spend on CSR in the current year to the next financial year. There is also a reference on a cap of 2% to be spent on CSR, does this mean auditors cannot account any amount beyond 2% as CSR and any spend beyond 2% has to be categorized as donation? These concepts of overspend beats the concept of charity, which can mean a company, is giving more than what was asked. The interesting question then is how can the company spend more than the amount that is in question; is it not shareholders’ money that is being spent without taking their approval and law itself mandates only a 2% spend on CSR.
The questions that may arise in the reporting requirement for auditors in case of excess spend are:
i) Is the Board of Indian Companies authorised to spent more money on CSR than budgeted for?
ii) If 2% of net profit is the minimum amount that is prescribed by law, can the company spend more on CSR?
iii) What is the explanation from auditors in the notes to accounts in case of excess spends on CSR by the company?
The point for debate for the regulator is, if there can be a provision created to spend on CSR in the next financial year, where is the issue in not allowing corporates to set off the excess amount spent in next financial year. Since CSR is a commitment and is dependent on the amount that is available as cash, can the company not spend more amount in current year and claim a set off in the following year, where the cash can be used for expansion plans in business?
Provision for not-to-spend
The most tricky situation in the concept of CSR spend is when the board decides not to spend, in this case there does not exist any obligation nor the commitment. There may be a provision in the Act to direct companies to spend on CSR but if there is no intent to create a line item, where is the question of reporting in the notes to accounts. The guidance note is silent on reporting of a non-spend of CSR by auditors of company, whereas the Act clearly has put the onus on the Board of Directors to report the reason for not spending.
Can the auditors choose to report the same reasoning in the notes to accounts for not spending in CSR as mentioned in the Board’s Report or is there a more responsible reporting required by auditors for non-spend of CSR in the financial statement?
This is second article in series of analysing the guidance note of ICAI watch out for the last article soon!!!
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