Accounting Standard Board of Institute of Chartered Accountants of India has issued Frequently Asked Question on accounting for amounts incurred towards Corporate Social Responsibility (CSR) pursuant to the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.
In 2014, India became the first country to statutorily mandate CSR spending. Under the Companies Act, 2013, every company meeting certain prescribed thresholds must spend at least 2% of its average net profits during the 3 immediately preceding financial years on CSR activities (CSR Contribution)
On 22 January 2021, the Government gave effect to the 2019 and 2020 amendments to the provisions of the Companies Act, 2013 dealing with corporate social responsibility and issued the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021. This article explores the impact of the amendments.
The FAQ released by the Institute deals with the question of effect of these amendments on the accounting of amounts to be incurred towards CSR.
The question asked in FAQ is as follows:
On January 22, 2021, the Ministry of Corporate Affairs notified the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021. Pursuant to the amendment rules, companies are required to
spend the required amount (2% of average net profits of the company made during the three immediately preceding financial years) in every financial year for Corporate Social Responsibility (CSR) activities as prescribed under schedule VII or
transfer the unspent amount of
ongoing projects in a special account called Unspent CSR Account within 30 days of the end of financial year for use within a period of three financial years from the date of such transfer (with the balance unspent out of such account at the end of the three financial years to be transferred to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year); or
not relating to ongoing projects to such funds as mentioned in Schedule VII like Clean Ganga Fund or PMNRF etc. within 6 months of the end of financial year.
What is the effect of these amendments on the accounting of amounts to be incurred towards CSR?
The issue is analysed below with reference to Companies (Indian Accounting Standards) Rules, 2015. Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, defines liability and obligating event and explains past event as under. The obligating events requiring recognition of CSR expenditure (and a liability, as applicable) occur as follows:
during the financial year, when carrying on CSR activities (spending/incurring);
at end of the financial year, to the extent of the “unspent amount” relating to:
ongoing projects and (ii) other than ongoing projects.
Accordingly, CSR expenditure would be recognised as expense in the statement of profit or loss as and when such expenditure is incurred on the CSR activities undertaken as per the Board approved CSR Policy and CSR projects during the financial year. For the “unspent amount”, a legal obligation arises to transfer to specified accounts depending upon the fact whether such unspent amount relates to ongoing projects or not. Therefore, liability needs to be recognised for such “unspent amount” as at the end of the financial year as per para 17(a) of Ind AS 37.
Further as per Ind AS 34, Interim Financial Statements, CSR obligation will be recognised based on the principles for recognition of the same in annual financial statements.
Provisions relevant for the instant issue under AS 29, Provisions Contingent Liabilities and Contingent Assets, and AS 25, Interim Financial Statements, are similar to Ind AS 37 and Ind AS 34, respectively. Accordingly, conclusions drawn above equally apply under Companies (Accounting Standards) Rule, 2006 also.
The FAQ's issued by ICAI can be accessed at: