The dilemma in Corporate Social Responsibility (CSR) is not in choosing to spend or how much to spend; it is all about reporting and how much to report. The statutory auditors are faced with this dilemma while reporting on CSR for companies. The responsibility of Boards on CSR is about what to spend, where to spend and when to spend. Once their job is over it is upto the auditors to figure out what to report, how to report, where to report, why to report. These issues are well articulated in Guidance note on Accounting for expenditure on Corporate Social Responsibility Activities (Guidance note) introduced in May 2015 by the Institute of Chartered Accountants (ICAI), which tries to provide some clarity but has ambiguity on reporting disclosures, that results in the onus being shifted to the auditors on reporting.
An analysis of Nifty 50 brings out the fact that there was no uniformity in reporting for FY 2014-15 and the reason attributed was the delay in releasing the guidance note and most listed companies had already decided on the reporting structure. For March 31, 2016 it is to be seen if the community of auditors stick to a specific style of reporting or will there be shades of grey & white in reporting.
This is not CSR
The point 5 of the guidance note clearly brings out the scope of what is CSR and how it should be reported. As per the guidance, the following are the categories that are not CSR for the purpose of reporting in financial statements:
1. All activities that is undertaken in pursuance of its normal course of business
2. Programmes or activities that benefit only the employees of the company and their families
3. Programs or projects or activities cannot be considered as a CSR activity that are carried out by the Company:
- as a pre-condition for setting up a business
- as part of a contractual obligation undertaken by the company
- in accordance with any other act
- as a part of the requirement in this regard by relevant authorities
CSR, is it an obligation or a commitment – note no. 6 to 9
There is a thin difference in the literal meaning of the terms obligation and commitment. Section 135(5) of Companies Act 2013 (Act) requires the Board of to ensure that every company that falls under the eligibility criteria of CSR spend has to earmark 2% of its net profits to be spent on the various program, projects or activities listed out in schedule VII of the Act. It thus becomes an obligation or responsibility of Board to set apart this amount. The responsibility of Boards to spend then becomes a commitment or a promise to spend this money during the year based on the interpretation on the words “shall ensure” in section 135(5).
If CSR is an obligation and a commitment why have corporates not created a provision in the books of account to spend this amount on CSR in the current financial year (FY 14-15) andsince it is a promise to spend, a provision in the books for spending it at a future date.
The issue - Without creating a provision in the books of account can the company spends the CSR amount of last year in this year, what will be the implication in the reporting requirements of last year and this year accounts is to be seen
CSR spend - is it voluntary or compulsory
The language used for CSR spend in the second proviso to section 135(5) of the Act reads “if the company fails to spend such amount”, does that mean CSR as a concept when it was conceived the regulators wanted all the companies to compulsorily spend the amount. – A compulsory act in the Act.
In the Act it is further stated, “in the Boards’ Report shall specify the reasons for not spending the amount”. The word shall means the regulator is interested in knowing why the money was not spent on CSR. – A voluntary act in the Act.
This leaves us thinking, whether CSR is compulsory or voluntary and if there is no compulsion on spending the amount, where is the question for creating a provision for spending CSR. But there is a reference on creating a provision on CSR spends in the guidance note issued by ICAI.
Quantifying the CSR Spend
The amount that is proposed to be spent on CSR is not an apportionment out of the profits of the company as the regulators seem to have only quantified the spend as a percentage of profits for easy understanding of the proposed amount to be spent, which is 2% of the net profits of the company.
Creating a Provision for CSR Spend
The law has not allowed for creating a provision for CSR Spend, as the intention of the regulators was to ensure that corporates identified the amount, created a budget and ensured that the Boards spent the amount. The guidance note has suggested that the requirement of reporting on CSR spend will be a line item in the profit and loss account which is to be shown as “Expenditure on CSR”.
Can a company over spend or under spend on CSR.
Reporting of CSR is not a line item; Chartered Accountants may have to look into other aspects of reporting. This is first in the series of my article analysing the guidance note of ICAI, watch out!!
Tags Corporate Law