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Close on the heels of the Ministry of Corporate Affairs (MCA) requiring companies to mandatorily spend their Corporate Social Responsibility (CSR) obligation, the CA Institute has clarified on the accounting treatment of the unspent amounts, stipulating that Corporate India should create “liability” for such amounts in their financial statements every year.
Both the MCA and the ICAI actions, when seen together, would mean that the corporates cannot escape from their CSR obligations by explaining the reasons for the underspend. “They will have to provide as ‘liability’, the amounts remaining unspent in a financial year,” said a top ICAI official.
‘FAQs issued’
This could now result in a hit on the bottomline of companies that hitherto opted not to fulfil their CSR spend and came with explanations for not doing so.
“This ICAI clarification has been made as a FAQ and it follows the MCA bringing amendments in the CSR rules in January 2021. This will instill more discipline among corporates as they will have to spend or earmark the unspent to certain designated accounts. Further, they would have to account for the unspent amount as a liability in the same financial year”, Nihar Jambusaria, President, ICAI told BusinessLine.
He said that ICAI’s Accounting Standards Board deliberated on the Accounting Standards and came to a conclusion that at the end of the financial year, a provision has to be made on the unspent amount. Asked if a company does not still make provision for unspent amount of CSR, Jambusaria said that auditors will have to qualify the accounts. “The FAQs issued by ICAI are binding on its members,” he said. This accounting treatment will apply from current financial year 2021-22 itself.
Under company law, a corporate is supposed to spend 2 per cent of its net profit in the preceding three financial years towards CSR. “Prior to January 2021, if a corporate did not spend its entire CSR amount, it had to explain why it couldn’t spend it. That’s all. But now if a corporate is unable to spend on an ongoing project, I will have to transfer it to an earmarked bank account and after our FAQ also provide for the unspent amount as liability,” Jambusaria said.
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