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Simplifying the Guidance Note GN(A) 34 for Corporate Social Responsibility
The Guidance Note distinguishes activities that do not qualify as corporate social responsibility
All expenditure on CSR activities should be recognized as a separate line item classified as ‘CSR expenditure’ in the P&L statement, along with a relevant note disclosing the break-up of various heads of expenses pertaining to the line item
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The Companies Act 2013 superseded the Companies Act 1956 and came into effect from April 1, 2014. Section 135 of the Act on Corporate Social Responsibility(CSR) mandated the Board of qualifying [1] companies to set forth a CSR policy, constitute a CSR committee at the board level, allocate two percent of average net profits of the three preceding financial years for CSR and ensure that these CSR activities are carried out in project or programme mode aligned with the Schedule VII items. It further requires that the board of directors to disclose the CSR spend and activities in their annual reports.
In order to bring further clarity on accounting for the CSR spend, arising as a result of the introduction of Section 135, the Council of the Institute of Chartered Accountants of India (ICAI) released the ‘Guidance Note on Accounting for Expenditure on Corporate Social Responsibility Activities’, GN(A) 34 on 15th May 2015. This Note succeeds the ‘Frequently Asked Questions on the provisions of Corporate Social Responsibility under Section 135 of the Companies Act 2013 and Rules thereon’ issued by the Corporate Laws & Corporate Governance Committee ICAI in April 2015, which now stands withdrawn.
The Note is intended to provide guidance to companies on recognising what qualifies as CSR, measuring the spend, accounting the spend incurrred and disclosing the CSR expenditure in the light of the CSR Law.
The Companies (Corporate Social Responsibility Policy) Rules, 2014 specifies that CSR activities are those that exclude activities undertaken in pursuance of its normal course of business. The ICAI Note clearly distinguishes those activities that do not qualify as CSR as follows:
- that which benefit only the employees of the company and their families
- that carried out as a pre-condition for setting up a business, or
- that carried out as part of a contractual obligation undertaken by the company, or in accordance with any other Act
- requirements under relevant regulations or otherwise prescribed by the concerned regulators as a necessary part of running of the business
The CSR activities itself may be undertaken in one of the following ways and accounted for as explained:
- Contribution to the funds as specified in Schedule VII to the Act – treat the contribution as an expense and charge to the P&L statement.
- Through registered trust or a registered society or a Section 8 company – treat the spend as an expense and charge it to the P&L statement
- Any other way, including self- implementation by the company directly
- Products: Recognise the value of goods manufactures (in accordance with the Accounting Standard (AS) 2, Valuation of Inventories) as the expenditure on transfer of control on good.
- Services: Recognise the cost of allowable services of the employees (cost-to-company) as the expenditure on rendering of service
- Indirect taxes incurred in providing the goods and services such as excise duty, service tax and others are also charged as CSR expense
Should there be a case where the CSR activity results in creating or acquisition of an asset, the company can treat it as an expense and charge it to the P&L if control is transferred to another entity. If the company retains control of the asset, the profits so accrued will not form part of the business profits of the company. The surplus arising from CSR activities is considered as ‘income’ for accounting purposes – it should be recognised as a liability for CSR expenditure in the balance sheet and as a charge to P&L statement.
All expenditure on CSR activities should be recognized as a separate line item classified as ‘CSR expenditure’ in the P&L statement, along with a relevant note disclosing the break-up of various heads of expenses pertaining to the line item. Thenotes to accounts relating to CSR expenditure should contain the following:
a) Gross amount required to be spent by the company during the year
b) Amount spent during the year:
The above disclosure would be in line with the ‘Annual Report on CSR Activities’ provided in the Board of Directors report. The ‘Annual Report on CSR Activtiies’ requires Directors to disclose a reason for shortfall should the company not have spent the allocated 2% of average net profits towards CSR. To this extent, the Note clarifies that the liability incurred on a CSR activity by entering into a contractual obligation (through a provision for the amount representing the extent to which the CSR activity was completed during the year) will be recognised in the financial statements and will count as CSR spend for the year. If expenditure incurred on CSR is in excess of the recommended 2% of average net profits, the excess amount cannot be carried forward for set off against the CSR expenditure required to be spent in future.
This Guidance Note from ICAI is timely as the first financial year since Section 135 has come into effect comes to a close. By outlining the requirements of the CSR Law and guiding companies in accounting for the CSR expenditure, the Note will help streamline the disclosures on CSR.
-By Priya Malebennur and Divya Nawale
[1]Companies with net profits of INR 5 cr or more or net worth of INR 500 cr or more or turnover of INR 1,000 cr or more during any financial year
The thoughts and opinions shared here are of the author.
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