Corporate Social Responsibility

Corporate Social Responsibility

- Introduced in Company Act 2013.

Application of CSR:

If any of the following conditions are satisfied CSR will be applicable:
1. Company having Net worth of Rs.500 Cr or more.
2. Turnover of Rs.1000 Cr or more.
3. Net profit of Rs.5 Cr or more during any financial year.

The company covered under CSR shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director. The same should be disclosed in Board Reports.

Work of CSR Committee:

The Corporate Social Responsibility Committee shall formulate and recommend to the Board a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII of the Companies Act, 2013.

Recommend the amount of expenditure to be incurred on the activities referred to above and monitor the Corporate Social Responsibility Policy of the company from time-to-time. 

Compliance:

The Board of every company shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy. (The company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility.)

Provided further that if the company fails to spend such amount, the Board shall, in its report made specify the reasons for not spending the amount.

Average net profit shall be calculated in accordance with the provisions of section 198 of the Companies Act, 2013.

Recognition and measurement principles:-

Whether provision should be created for amount spent short in accordance with the Companies Act, 2013?

The Board of every company shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy, provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility, provided further that if the company fails to spend such amount, the Board shall, in its report made specify the reasons for not spending the amount. [Relevant extracts of Section 135 of the Companies Act, 2013]

One of the questions which arises here is whether the company is required to create provision in the financial statements for the amount spent less as per the above requirements [i.e., less than 2% of the average profits].

Considering the above provisions, it is clear that the intention of the law is not to create the provision for the amount spent less as per the requirements of section 135 of the Companies Act, 2013, instead it requires that if the company fails to spend such amount, the Board shall in its report made specify the reasons for not spending the amount.

However, as per the general accounting principles if CSR activity has been taken up and liability has been incurred then provision should be created for the activities completed and should be recognized in the financial statements.

Whether the company can carry forward excess amount spent in accordance with Companies Act, 2013?

As per section 135 of the Companies Act, 2013, the Board of every company shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy. Accordingly, two percent is the minimum amount required to be spent and, hence, any extra amount spent is not allowed to be carried forward.

CSR Expenses

A company may discharge CSR obligations:-

  -  By contributing to the fund [As highlighted in Schedule VII of the Companies Act, 2013]
  -  Via registered trust or registered society under section 8 of the Companies Act, 2013
  -  Spend the amount on its own as prescribed under CSR Rules, 2014

One of the questions which arises here is whether contribution to the fund should be recognized as expense in the financial statements? As per the accounting principles, contribution to the fund should be treated as an expense in the financial statements. Further, in case CSR obligation is discharged via registered trust or registered society then the same should also be treated as an expense in the financial statements.

However, in case the CSR amount is spent on its own in accordance with CSR Rules, 2014 then the company should assess whether the amount spent meets the definition of asset in accordance with accounting framework? If the amount spent does not meet the definition of asset then such amount should be expensed off in the financial statements.

When goods manufactured or services rendered by the company are transferred as CSR expenditures

It may happen that the company has transferred, as a part of the CSR expenditure, goods manufactured by it or services rendered by it. Following principles should be followed in such cases:-

Transfer of goods manufactured by company

Transfer of goods manufactured by company for CSR activity should be treated as CSR expense when the control of the goods is transferred by the company. The cost of such goods should be measured in accordance with AS 2. Any indirect taxes paid should also form part of the CSR expenditure.

Services rendered by the company

Services rendered by the company for CSR activity should also be treated as CSR expense when services are rendered. Services rendered should be measured at cost. Any indirect taxes paid should also form part of the CSR expenditure.

 Receipt of grant for carrying out CSR expenditure

Certain companies may receive grant to meet the CSR expenditure. In case grant is received and used by the company for carrying out CSR expenditure then cost of CSR expenditure should be measured at net of grant received.

 Treatment of surplus arising from CSR projects or programs

The CSR Policy of the company shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company. [Rule 6(2) of the CSR Rules, 2014]

One of the questions which arises here is whether surplus arising from CSR projects/ programs should be treated as income in the financial statements? Surplus ordinarily shall mean that income is more than the expenditure. In accordance with the accounting principles of AS 5 and framework for preparation and presentation of financial statements, the surplus should be considered as an income and should be included in the statement of profit and loss. Since such surplus is not a business profit a corresponding liability should be immediately recognized in the balance sheet by recognizing a charge in the statement of profit and loss.

Further, such surplus should not be considered for the computation of 2% of the average profits of the company.

Presentation and Disclosures:-

Following are the presentation and disclosure requirements in respect of CSR expenditure:-

  -  Schedule III of the Companies Act, 2013 requires that the amount of expenditure incurred on CSR activities shall be disclosed by way of note to statement of profit and loss.

  -  Disclosure of expenditure as a separate line item in the statement of profit and loss is recommended.
  -  Note should include the breakup of various heads of expenses included in CSR expenditure.
  -  Note should provide the gross amount spent, amount spent (disclosing expenditure incurred on construction/ acquisition of asset or expenditure incurred on other purposes bifurcating cash paid and yet to be paid).
  -  Details of related party transactions (such as contribution to a trust, etc.), if any.
  -  Details of provisions made, if any

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