This article consists of brief notes on Corporate Social Responsibility(CSR) simply to understand easily.
Corporate Social Responsibility (CSR) is a corporate initiative to assess and take responsibility for the company's effects on the environment and its impact on social welfare.
Socially responsible companies do not limit themselves to using resources to engage in activities that increase only their profits. They use CSR to integrate economic, environmental, and social objectives with the company's operations and growth.
Table of Content:
1. What is meant by Corporate Social Responsibility (CSR)?
2. Is there any statutory provisions for CSR?
1. What is meant by Corporate Social Responsibility(CSR)?
CSR means and includes but is not limited to :
- Projects or programs relating to activities specified in schedule VII or
- Projects or programs relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR committee of the board as per the declared CSR policy of the company.
2. Is there any statutory provisions for CSR?
In India, the Companies Act, 2013 has statutorily recognized the concept of CSR, Section 135 of the Companies Act, 2013 read with Schedule VII there too and companies(CSR Policy) Rules, 2014 are the special provisions under the new company law regime imposing mandatorily CSR obligations.
3. Which company to perform Corporate Social Responsibility(CSR)?
Every company including its holding or subsidiary and a foreign company defined under section 2(45) of the Act having its branch office or project office in India which fulfills the criteria specified in sub-section (I) of section 135 of the Act shall comply with the provisions of section 135 of the Act and these rules:
Provided that net worth, turnover, and profit of a foreign company of the Act shall be computed by balance sheet and profit and loss account of such company prepared by the provisions of clause (a) of sub-section (1) of section 381 and section 198 of the Act.
4. Which companies are required to constitute a CSR committee?
As per section 135 of the companies Act, 2013
Every company has either
- Net worth of Rs.500 crore or more, or
- Turnover of Rs.1,000 crore or more, or
- A net profit of Rs.5 crore or more
during the immediate preceding financial year shall constitute a Corporate Social Responsibility(CSR) Committee of the board consisting of three or more directors (including at least one independent director). However, if a company is not required to appoint an independent director under section 149(4) of the Companies Act, then its CSR committee shall be formed with 2 or more directors.
5. What are the important points of CSR Activities?
- The CSR activities undertaken by the company shall exclude activities undertaken in pursuance of its normal course of business.
- A company may collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR committees of respective companies are in a position to report separately on such projects or programs by these rules.
- The CSR projects or programs or activities undertaken in India only shall amount to CSR expenditure.
- The CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered CSR activities by section 135 of the Act.
- Companies may build CSR capabilities of their own personnel as well as those of their implementing agencies through institutions with established track records of at least three financial years but such expenditure (incl. expenditure on administrative overheads) shall not exceed 5% of total CSR expenditure of the company in one FY.
- Contribution of any amount directly or indirectly to any political party, shall not be considered a CSR activity.
- The surplus arising out of the CSR activities shall not form part of the business profit of a company.
- CSR expenditure shall include. all expenditures including contributions to the corpus, for projects or programs relating to CSR activities approved by the board on the recommendations of the CSR committee, but does not include. any expenditure on an item not in conformity or not in line with activities that fall within the purview of Schedule VII of the Act.
- The Boards Report of a company shall include. an annual report on CSR containing particulars as specified.
6. What are the Accounting treatments for CSR transactions?
The accounting treatments for CSR transactions are based on the nature of expenditure. They are as follows :
Case I: Accounting treatment of Revenue expenditure made in the current FY:
CSR Expenditure is a Profit or Loss statement.
CSR Expenditure (P/L Statement) Dr. XXX
To Cash / Vendor XXX
Case II: Accounting treatment of expenditure made towards Capital Asset:
In case the expenditure incurred by the company is of such a nature that gives rise to an "asset ", it should be recognized by the company in its balance sheet, provided the control over the asset is with the company and the future economic benefits are expected to flow to the company.
a) Accounting treatment as per AS
CSR Asset (Balance sheet) Dr. XXX
To Cash / Vendor XXX
here, Asset means either Tangible or Intangible asset
b) Accounting treatment as per Ind AS
The accounting entry as given above is the same. However, there is a difference in the classification of Non-current assets under Ind AS.
Where any CSR asset is recognized in its balance sheet, the same may be classified under natural head (eg. PPE, Intangible asset, or Investment property) with a specific subhead of "CSR Asset" if the expenditure satisfies the recognition criteria of "asset".
The recognition criteria for the asset under Ind AS i.e
- Ind AS 16: Property, Plant and Equipment (PPE)
- Ind AS 40: Investment Property
- Ind AS 38: Intangible Assets
to be satisfied.
7. Whether provision for an unspent amount required to be created? and what are the consequences in case contravenes the provisions of the Act?
a)Other than Ongoing projects
Section 135(5) of the Companies Act, 2013 requires that the board of every eligible company, shall ensure that the company spends, in every FY, at least 2% of the average net profits of the company made during the three immediately preceding FYs or where the company has not completed the period of three FYs since its incorporation, during such immediately preceding FYs in pursuance of CSR policy.
A proviso to this section states that" if the company fails to spend such amount, the board shall, in its report specify the reasons for not spending the amount and, unless the unspent amount relates to any ongoing project, transfer such unspent amount to a fund specified in schedule VII, within 6 months of the expiry of the FY.
As per the Companies (Amendment) Act, 2019, the Company must transfer the unspent amount "other than relating to Ongoing project" to a specified fund.
Accordingly, a provision for liability for the amount representing the extent to which the amount is to be transferred needs to be recognized in the financial statements.
b)Ongoing Projects
Any amount remaining unspent, under any Ongoing project, transfer such amount within 30 days from the end of the FY to the "Unspent CSR Account" opened for that FY. Spent such amount within 3 FYs from the date of such transfer. If not spent then transfer the same to a fund Specified in Schedule VII, within 30 days from the date of completion of the 3rd FY.
If a company contravenes the provisions, the company is punishable with a fine which shall not be less than Rs.50,000 but which may extend to Rs.25,00,000, and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs.50,000 but which may extend to Rs.5,00,000, or with both.
8. Whether the excess amount can be carried forward to set off against future CSR expenditure?
Where a company spends more than that required under law, a question arises as to whether the excess amount 'spent' can be carried forward to be adjusted against amounts to be spent on CSR activities in the future period.
Since 2% of average net profits of immediately preceding 3 FYs is the minimum amount which is required to be spent under section 135(5) of the Act, the excess amount cannot be carried forward for set-off against the CSR expenditure required to be spent in future.
9. Are supply of manufactured goods/services by an Entity considered CSR expenditure?
Yes, they are also considered CSR expenditure.
In some cases, a company may supply goods manufactured by it, or render services as CSR activities. In such cases, the expenditure incurred should be recognized when the control on the goods manufactured by it is transferred or the allowable services are rendered by the employees. Provided
- The goods manufactured by it should be valued as per AS 2, Valuation of Inventories.
- The services rendered should be measured at cost.
- Indirect taxes on goods and services so contributed will also form part of the CSR expenditure.
- Where a company receives a grant from others for carrying out CSR activities, the CSR expenditure should be measured net of the grant.
10. How to recognize the income earned from CSR projects/programs or during the conduct of CSR activities?
Rule 6(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 requires that "the surplus arising out of CSR projects or programs or activities shall not form part of the business profits".
The surplus arising from CSR activities is not arising from a transaction with owners, it should be considered as "Income" for accounting purposes.
Given the aforesaid requirement, any surplus arising out of the CSR projects or programs or activities shall be recognized in the statement of profit or loss and since this surplus cannot be a part of the business profits of the company, the same should immediately be recognized as liability for CSR expenditure in the balance sheet and recognized as a charge to the statement of profit and loss.
Accordingly, such surplus would not form part of the minimum 2% of the average profits of the company made during the three immediately preceding FYs in pursuance of its CSR policy.
11. Whether the CSR expenditure allowed as a deduction as per Income Tax Act?
CSR expenditure being an application of income, is not incurred wholly and exclusively to carry on a business. As the application of income of a company, the amount spent on CSR expenditure for the purposes of computing taxable income of a company.
Also Read :
Sharing is caring!
Hii thanks for this Nice Post Really appreciate it.
ReplyDelete