FAQ on CSR Liability issued by The Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India has issued an FAQ on CSR Liability: https://resource.cdn.icai.org/64758asb51955.pdf

 

Any company that meets the targets specified in sub section (1) OF SECTION 135 and  has made profits for the past two years and the current year in aggregate is required to spend 2% of the average profits in the next year. For example, a company made profit in 2018-19, 2019-20 and 2020-21 of Rs.1000 crores each is obliged to spend at least Rs.20 crores on CSR in the year 2021-22. If not spent, the amount is to be transferred to a designated account at the end of 2021-22. The issue is when to recognise liability.

 

As per the FAQ, liability would be recognised as and when the company spends and for unspent amount at the end of 2021-22. Therefore, a company can manage quarterly results by spending more or less amounts in a quarter and recognise a liability for unspent amount at the end of 2021-22. The FAQ proposes accounting based on when is the company required to transfer unspent amount to designated account. Thus FAQ regards the transfer of unspent amount as the obligating event.

 

As per IFRS, by virtue of IFRIC 21, the liability must be recognised on first day of 2021-22. This is also the position under Appendix C of Ind AS 37. However, FAQ postpones the recognition of the liability for a year. IFRIC 21 and Appendix C of Ind AS 37 regards the moment the company is required to spend as the obligating event.

 

Now, if we consider the conceptual framework for financial reporting, the liability must be recognised at the end of 2020-21 because the company being a going concern has no ability to avoid spending the amount in 2021-22. The conceptual framework regards having profits in aggregate for the current year and past two years as the obligating event.

 

Which of the three according to you provides the information on financial position to users to enable them to make proper economic decisions? 

May 11, 2021

CA Manish C. Iyer
CA Manish C. Iyer

May 11 2021

The requirement of Conceptual Framework provides the user best information on financial position of the three and the requirement of FAQ provides the worst information on financial position of the three.