Companies Act 2013, introduced the concept of CSR whereby companies that meet specified criteria are required to make CSR contribution of 2 percent of the average net profit of the last three years. The compliance with this requirement was voluntary and followed the rule of complying or explain.
Subsequently, the law was amended whereby compliance was made mandatory. The revised section and rules were notified with effect from January 22, 2021. Consequent to this revision, CSR contribution has become mandatory as there is now a legal obligation.
With the said amendment, penal provisions have also been inserted if the company makes default in complying with the minimum amount required to be spent on CSR activities or the treatment of the unspent amount if any. The penalty is specified to be twice the unspent amount subject to a maximum of one crore rupees for the company and for the officer in default penalty will be 10% of the unspent amount subject to a maximum of two lakh rupees. These amendments are also notified, at a time when the whole industry is facing the enduring impact of the epidemic that began in early last year. When the severely affected entities are striving to break even the earnings and cash flows, the mandated CSR may not be appealing to them
Apart from the debate whether the government was justified in making this mandatory or whether it is an indirect way to tax the companies, there were a lot of interesting accounting issues which were debated within the accounting fraternity and corporate world as the accounting impact could be as large as 2 percent of the profits and consequent impact on the EPS and PE ratio.
Accounting position prior to the amendment
Considering the legal position of compliance or explanation, the ICAI came out with guidance on accounting for CSR and as per the said guidance note, no provision was required for the unspent amount. Due to its discretionary nature, to date, the CSR expenditure was accounted as and when incurred like any other expenses and reasons were given in the board report for the unspent amount.
The guidance note prescribed various disclosure in the notes to accounts, cash flow statements, etc. so as to enable the investors to understand the impact of the CSR spending.
Accounting position post amendment
Ministry of Corporate affairs notified the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 amending the treatment of unspent amounts to be incurred towards Corporate Social Responsibility.
As per the said amendment, the annual shortfall in the amount required to be incurred towards CSR has to be transferred to specified accounts as elaborated below:
1. Unspent amount relating to ongoing projects
Transfer to a special account called ‘Unspent CSR Account’ within thirty days of the end of the financial year. This has to be used within a period of three financial years from the date of such transfer and thereafter if the amount remains unspent, the same shall be transferred to fund specified in Schedule VII, within a period of thirty days.
2. Unspent amount is not related to ongoing projects
Transfer the amount to funds as mentioned in Schedule VII like Clean Ganga Fund or PMNRF etc. within six months of the end of the financial year.
Further it has also been clarified by the ICSI in its FAQ that the unspent amount of CSR pertaining to a financial year should be spent in that financial year only i.e. before March 31. Companies are not permitted to spend the unspent CSR amount after the end of the Financial Year and if the CSR obligation remains unspent, partially or fully, it is required to be transferred to account or funds as mentioned above.
Consequent to the above change, there were questions as regards to accounting for unspent CSR amount and whether a provision is required to be made in year in which the profit is earned or in the year in which contribution is required to be made.
It has been clarified that CSR expenditure is required to be accounted as and when incurred and if the company has any unspent amount at the end of the year, the legal obligation arises to transfer the unspent amount to specified accounts requiring the recognition of liability as per Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets. The requirement for the provision is also required in case on unspent amount with respect to on-going projects.
With regard to accounting in interim financial statement, the ICAI has clarified that similar principles as per annual financial statements shall be adopted.
This would mean that provision is required in the year in which contribution is required and similarly for interim financial statement, in the first three quarters accounting for CSR would be based on expenses incurred and in the last quarter, shortfall if any would be provided for.
Appropriate changes to the accounting policies of the eligible companies would be required to be made. The quarterly & annual results for companies who have not contributed to the CSR for the year ended March 2021 would be impacted as provision would be required.
This clarification though does not meet the criteria of matching concept of accounting as the profit would be earned in the earlier years and the liability accounting would happen in the subsequent years, it would make the accounting simple.
The authors, CA Prashant Daftary and CA Sandesh Rajapkar, are Partner and Assistant Manager – Audit respectively, at NA Shah Associates. The views expressed are personal
First Published: IST