Finance & Accounting

Impact of New Companies (Accounting Standards) Rules, 2021 issued by MCA

Impact of New Companies (Accounting Standards) Rules, 2021 issued by MCA

The Companies (Accounting Standards) Rules, 2021 were published on June 23rd, 2021 by the Ministry of Corporate Affairs under the Companies Act, 2013. Such notification has been issued in consultation with the National Financial Reporting Authority (NFRA). These rules comprise accounting standards, the modified definitions of small and medium-sized companies (SMCs), and relaxations offered to these SMCs.

In this blog, we make an attempt to explain the major changes brought in by the new rules and their impact. The new rules are issued as a replacement of the Companies (Accounting Standards) Rules 20061. They serve as a set of accounting standards that SMCs can use and follow to prepare their general-purpose financial statements.

Companies Accounting Standards Rules, 2021: Date of Applicability

The Indian Accounting Standards (Ind AS) are employed by larger companies and are quite comparable to the International Financial Reporting Standards (IFRS) used in most developed countries. In comparison to Indian Accounting Standards (Ind AS), the accounting standards for SMCs, which were notified in the month of December 2006 and updated from time to time, are substantially easier. These accounting rules have a lower level of complexity in their implementation, as well as a lower number of required disclosures.

The Companies (Accounting Standards) Rules, 2021 will apply to accounting periods beginning on or after April 1, 2021.

Accounting Standards 1 to 5, 7, & 9 to 29, as proposed by the Institute of Chartered Accountants of India (ICAI), are listed in the Annexure to these rules specified by the Central Government. These Accounting Standards must be followed when preparing financial statements.

Definition of SMC

The notification now includes a revised definition of SMCs. The updated SMC definition lifts the turnover limit from Rs 50 crore to not more than Rs 250 crore, as well as the borrowing limits. This is in addition to the requirement that such entities be unlisted and not banks, financial institutions, or insurance companies.

Under the new Companies (Accounting Standards) Rules, 2021, a Small and Medium-Sized Company (SMC) is defined as follows:

An SMC is a company:

  1. Whose equity/debt securities aren’t listed or not in the process of being listed on any stock market in India or abroad,
  2. Which is neither a bank, a financial institution, nor an insurance firm,
  3. Whose turnover (excluding other income) in the previous accounting year was not more than 250 crore rupees,
  4. Which does not have any loans/borrowings (including public deposits) in excess of 50 crore rupees at any point during the previous accounting year, and
  5. Which is not a holding company or a subsidiary of a company that is not a small or medium-sized company.
READ  What is Account Receivable Services and why to choose?

According to law, a company qualifies as a Small and Medium-Sized Company if all of the conditions listed above are met at the end of the relevant accounting period.

Notes:

  • To clarify what constitutes other income as stated in point 2, let’s take an example. Profit on the sale of Property, Plant, and Equipment, for instance, should be categorized as other income rather than other operating revenue because it is not an operating activity of a company. The sale of manufacturing scrap resulting from operations for a manufacturing company, on the other hand, should be classified as other operating revenue because it is related to the company’s principal operating activity.
  • The above turnover criteria have to be looked at for the immediately previous fiscal year, i.e., if a company is determining whether it is an SMC or not for the fiscal year 2021-22, the turnover for the fiscal year 2020-21 must be considered.
  • Despite the fact that the term “borrowings” is not defined in these Rules, it will include all loans, debentures, bonds, & other debt instruments issued by the company, as well as public deposits.
  • Unlike the turnover limit, the threshold limit of borrowing is based on monies borrowed at any point during the previous financial year. As a result, even if a company’s year-end balance was less than Rs. 50 crores, it would be classified as non-SMC if it had borrowed monies in excess of Rs. 50 crores but repaid some of the borrowings prior to the year-end.

Companies Accounting Standards Rules, 2021: Obligation to comply with accounting standards

Except for companies to which Indian Accounting Standards as notified under the Companies (Indian Accounting Standards) Rules, 2015 apply, every other company and its auditor(s) must comply with the Accounting Standards under the new rules.

In other words, the Companies (Accounting Standards) Rules, 2021, will be applicable for non-Ind AS companies, i.e., companies that are not required to apply Indian Accounting Standards as specified under the Companies (Indian Accounting Standard) Rules, 2015.

Exemption or relaxation to SMCs

There are many exemptions available to small & medium-sized companies that are not available to other companies. They are exempt from reporting cash flow statements and providing a segmental breakdown of their financial performance in obligatory filings entirely.

Accounting Standard – 3 ‘Cash flow statement’ and Accounting Standard – 17 ‘Segment reporting’ are not applicable to SMCs. SMCs are exempt from them. However, the exemption of Accounting Standard 3 will apply only to companies with a paid-up capital of up to Rs. 50 lacs and a turnover of up to Rs. 2 crores. Beyond these limits, Section 2(40) of the Companies Act 2013 requires the preparation of a cash flow statement.

SMCs are also given some relaxation from detailed disclosures that are required to be made by the Accounting Standard 15 – ‘Employee Benefits’. Further, they are also granted certain relaxations from detailed disclosures with regards to an operating lease as well as a finance lease.

READ  Disadvantages of Outsourcing Accounting Services 

In addition, the disclosure of diluted earnings per share (DPS) is not needed for SMCs. If all options to convert other securities into shares are executed, diluted earnings per share reflect a company’s earnings per share.

SMCs can also give an estimated value in the use of assets on their balance sheets, and they aren’t obligated to employ present value procedures to do so. The present value of future cash flow flowing from the continuous use of an asset & its disposal at the end of its useful life is referred to as the asset’s value in use. Larger enterprises, on the other hand, must utilize present value approaches and disclose the discount rates used to calculate an asset’s worth in use.

Management estimates might be used instead of present value methodologies for the purposes of impairment provision. In many circumstances, this will also save money on the services of an expert or a valuer.

How do these rules affect SMCs?

The notification is intended to help small and medium-sized companies (SMCs) to revise their turnover and borrowing limitations, as well as to assist in making disclosure requirements less cumbersome.

The goal is to cut down on the amount of time it takes to generate financial statements while also lowering the compliance burden. As a result of this announcement, a large number of businesses will fall within the SMC classification. This, in turn, would allow a broader range of businesses to benefit from greater flexibility in accounting standards.

This amendment via Companies (Accounting Standards) Rules, 2021 follows the government’s recent changes to the Micro, Small, & Medium Enterprises Development Act, 2006, which also increased the upside limit of turnover requirements for registration for micro, small, and medium enterprises.

Why was it important?

These SMC limits had not been changed in years, and given the overall economic growth, it was critical that they be increased. The benefits of this amendment would now be available to a much larger number of businesses.

Furthermore, the number of accounting standards and disclosure requirements has increased over time. These standards are constantly being revised to ensure that they meet international standards. All of these changes necessitate the formation of an additional task force of accountants.

Given the various disclosure requirements, the time required to prepare financial statements has significantly increased in general. And therefore, this has also increased the compliance burden on SMCs. This is why it was crucial that a larger set of companies could avail of exemptions by way of amendments in the Accounting Standards Rules for SMCs.

Change of status of SMC

In accordance with rules laid down by Central Government, SMCs need to follow the following instructions while complying with the Accounting Standards:

  • Change of status from Non-SMC to SMC
READ  Intra-Group Financing Arrangement

Existing companies that were not previously classified as Small and Medium-Sized Companies (SMCs) but later become SMCs are not eligible for exemption or relaxation in respect of Accounting Standards applicable to SMCs until they have been classified as SMCs for two consecutive accounting periods.

  • Change of status from SMC to Non-SMC

Where a company, being an SMC, earlier qualified for an exemption or relaxation but no longer qualifies for relevant exemption or relaxation in the current accounting period, the relevant standards or requirements become applicable from the current period, & the figures for the corresponding period of the previous accounting period do not need to be revised merely because it has ceded the relevant exemption or relaxation. The fact that the firm was an SMC in the preceding period and that it took advantage of the exemptions or relaxations available to SMCs must be properly disclosed in the notes to the financial statements, according to the MCA.

  • Disclosure by SMC

The government further instructed that an SMC that does not disclose certain information because of exemptions or relaxations granted to it must disclose (via a note to its financial statements) that it is SMC and has complied with Accounting Standards insofar as they apply to an SMC along the lines of, “The Company is a Small and Medium-Sized Company (SMC) as defined in the Companies (Accounting Standards) Rules, 2021 notified under the Companies Act, 2013. Accordingly, the Company has complied with the Accounting Standards as applicable to a Small and Medium-Sized Company.

Not opting for exemption

If an SMC chooses not to avail of any of the exemptions or relaxations available to it in relation to many but not all of the Accounting Standards, it must disclose which standard(s) it has used the exemption or relaxation for.

Additionally, if the SMC desires to disclose any information that is not required to be disclosed due to an exemption or relaxation available to SMCs, it must do so in accordance with the relevant accounting standards, as may be applicable.

What remains the same?

These amendments have no bearing on the compliance requirements of publicly traded companies, banks, financial institutions, and insurance companies, which must continue to comply with all accounting standards or Indian Accounting Standards, as applicable. Furthermore, under the transition provisions, the companies that meet SMC criteria for the first time must wait for at least two consecutive accounting periods before enjoying the exemptions or relaxations available to SMCs.

Other notes stated under the Companies Accounting Standards Rules

The Companies (Accounting Standards) Rules, 2021 also state that in the event that the accounting standards are not in accordance with the law, the provisions of the law shall take precedence, and the financial statements will be prepared as per the provisions of the law.

Moreover, Accounting Standards are designated to apply only to the financial items which are material.

Conclusion

The amendment will allow several small and medium-sized businesses to close their books of accounts in less time in comparison to large corporations. However, a company’s management can voluntarily opt out of such relaxations and exemptions so that their financial statements can be benchmarked against best practices.

G.S.R.E_23_06-2021_

References

  1. https://incometaxindia.gov.in/pages/rules/companies-rules-2006.aspx

Trending Posted