UNIT 1 CSR ACCOUNTING CSR Accounting

Structure

1.1 Introduction
1.2 Explaining the CSR Components of the Act from CSR Accounts
Perspective
1.3 CSR Expenditures
1.4 Impact of CSR Provision
1.5 Cessation of Compliance of CSR
1.6 Let Us Sum Up
1.7 Keywords
1.8 Bibliography and Selected Readings
1.9 Check Your Progress – Possible Answers

1.1 INTRODUCTION
Corporate Social Responsibility (CSR) enables business operations to
voluntarily interact with relevant stakeholders and assume accountability for
its impact on society and environment. (Commission of European
Communities, 2001)1.
With new CSR regulation in India, the task of companies has increased. They
are not only required to spend money but are also required to follow the
disclosure and other statutory requirements. This condition calls for attention
to various aspects of CSR accounting including CSR expenditure. In this unit
we will discuss various issues related to CSR accounting. After reading this
unit you will be able to:

• Explain the CSR components of the Act from CSR accounts perspective
• Define CSR expenditure
• Discuss the conditions of cessation of compliance of CSR

1.2 EXPLAINING THE CSR COMPONENTS OF

THE ACT FROM CSR ACCOUNTS
PERSPECTIVE
1.2.1 Provisions of the Companies Act, 2013
Ministry of Corporate Affairs, Government of India, through provisions of
Corporate Social Responsibility Policy Rules, 2014, under the Companies

1
Commission (2001). Promoting a European framework for corporate social
responsibility. Green Paper. Commission of European Communities.pp.1-32.
285
CSR Accounting Act, 2013, has made it mandatory (with effect from 1st April, 2014) for
and Audit
certain companies that fulfil the criteria as mentioned under Sub Section 1 of
Section 135 to comply with the provisions relevant to Corporate Social
Responsibility. The CSR Rules state that every company including its
holding or subsidiary, as well as foreign companies having a project
office/branch in India, meeting the following criteria during any financial
year, is required to comply with the CSR provisions. This statutory provision
is applicable for every company with:

in a financial year.

Now let us consider the following example for better understanding of

applicability of CSR:

Illustration 1

A company is formed as a charitable entity to carry on charity work.

Management of this company believes that CSR provision is not applicable
for them since charitable work is carried out in its normal course of business.
Are they right in their understanding?

Solution:

Section 135 of Companies Act is applicable to every company meeting the

specified criteria mentioned above. As per section 2(20) of the Companies
Act, ‘company’ means a company incorporated under the Companies Act or
under any other previous company law. This would imply that companies set
up for the purposes of CSR/public welfare are also required to comply with
the provisions of CSR.

Some Terms and Concepts for Explaining Applicability of CSR Rules

1. “Any financial year” refers to ‘any of the three preceding financial

years’.
2. “Turnover” means the aggregate value of the realization of amount
made from the sale, supply or distribution of goods or on account of
services rendered, or both, by the company during a financial year.
3. “Net worth” means the aggregate value of paid-up share capital and all
reserves created out of profits and securities premium account, after
deducting the aggregate value of accumulated losses, deferred
expenditure and miscellaneous expenditure not written off, as per the
audited balance sheet, but does not include reserves created out of
revaluation of assets, write-back of depreciation and amalgamation.
286
1.2.2 Spending on CSR CSR Accounting

The Board of Directors of the above-mentioned companies is to ensure that

the company spends, in every financial year, at least 2% of the average net
profits of the company made during the three immediately preceding
financial years on CSR.

4. “Financial Year”, ends on the 31st day of March every year. (i) If a
company is incorporated on or after the 1st day of January of a year, then
applicable financial year is the period ending on the 31st day of March of
the following year. (ii) In case a holding company or a subsidiary of a
company incorporated outside India follows a different financial year for
consolidation of its accounts outside India, may follow any period as its
financial year. Yet, within a period of two years, a company must align
its financial year to the 31st day of March every year.
5. “Average Net Profit” is the amount as calculated in accordance with the
provisions of Section 198 of the Companies Act, 2013.

Calculating the Average Net Profit for CSR Spending

CSR is applicable from FY 2014-15. For the purpose of CSR reporting the
Net Profit shall mean average of the annual net profit before tax of the
preceding three financial years. For Example

Particulars Amounts
(in INR)
Net Profit before tax as per books of FY 2017-18 2,500
Net Profit before tax as per books of FY 2016-17 1,700
Net Profit before tax as per books of FY 2015-16 1,000
TOTAL (A) 5,200
Average of annual net profit of the preceding three financial 1,733
years
B (A/3)
CSR expenditure for the FY 2018-19 - (B*2%) 34.67

In case a company spends more than the amount specified in Section 135(1)
of the 2013 Act (i.e., more than 2 per cent of its average net profits of three
preceding years) on CSR, the excess amount spent cannot be carried forward
to the subsequent years and adjusted against the next year’s CSR expenditure.
However, the company’s Board of Directors may carry forward any unspent
amount out of the minimum required CSR expenditure to the next Financial
Year. However, the carried forward amount would be over and above the
next year’s CSR allocation equivalent to at least 2 per cent of the average net
profit of the company of the immediately preceding three years.

287
CSR Accounting Net Profit means the net profit before tax of a company as per its financial
and Audit
statement prepared in accordance with Section 198 of the Act, but shall not
include the following, namely:

a) Any profit arising from any overseas branch or branches of the company,
whether operated as a separate company or otherwise.
b) Any dividend received from other companies in India, which are covered
under and complying with the provisions of section 135 of the Act.
c) Profit from premium of shares/debentures.
d) Profit from sales of Forfeited share.
e) Profit in terms of capital natures (in terms of undertaking of company or
any part of thereof).
f) Profit from the sale of immovable property/fixed assets/any capital
nature.
g) Any surplus change in carrying amount of an assets or liability
recognized in equity reserves.
Following shall not be considered as expenditure:
i) Income tax and any other tax on income
ii) Compensation, damages or other payments made voluntarily
iii) Loss of capital natures including loss on sale of undertaking of company
or any part of thereof
iv) Any transfer to assets/liabilities revaluation/equity reserves.

1.2.3 Role of Board of Directors in CSR

The board plays an important role in CSR activities. The role of the Board is
as below:

a) Approve CSR policy.

b) Ensure its implementation.
c) Disclose the contents of CSR policies in its report.
d) CSR policies are made available on the company’s website.
e) Ensure that statutorily specified amount is spent by the company on CSR
activities.

If the company fails to spend the statutory amount, the Board should mention
in its report about the reasons for not spending the amount.

Companies that are covered under CSR rules are required to constitute a CSR
Committee of the Board consisting of three or more directors, out of which at
least one director shall be an independent director. In case of a foreign
company, the CSR committee shall comprise of at least two persons, out of
288 which one person shall be nominated by the foreign company.
1.2.4 CSR Committee CSR Accounting

The compliance of CSR provisions under the Companies Act, 2013, i.e.,
constitution of a CSR committee, formulation of CSR policy, the spending of
requisite amount on CSR activities came into force from 01st April, 2014.
The CSR committee is responsible for:

a) Drafting the CSR policy and indicating the CSR activities to be

undertaken by the company
b) Recommending the amount of expenditure to be incurred on the
proposed CSR activities and
c) Monitoring the CSR policy of the company from time to time.

Illustration 2

A soft drink manufacturing company has a net worth of INR 100 crores.
Sales of soft drinks of this company were severely affected due to low
demand. Following is the financial performance of the company for the
current year and previous 3 years (INR in Crores):

Particulars March 31, March 31, March 31, March 31,

2014 2013 2012 2011
(Current
year)
Net Profit 3.00 8.50 4.00 3.00
Sales 850 950 900 800
(turnover)

Does the Company have an obligation to form a CSR committee since the
applicability criteria are not satisfied in the current financial year?

Solution

As per the act ‘any financial year’ implies ‘any of the three preceding
financial years’. A company which meets the net worth, turnover or net
profits criteria in any of the preceding three financial years, but which does
not meet the criteria in the relevant financial year, will still need to constitute
a CSR committee.

As per the criteria to constitute CSR committee:

1) Net worth greater than or equal to INR 500 Crores: This criterion is
not satisfied.
2) Sales greater than or equal to INR1000 Crores: This criterion is not
satisfied.
3) Net Profit greater than or equal to INR 5 Crores: This criterion is
satisfied in financial year ended March 31, 2013.
289
CSR Accounting Hence, the Company will be required to form a CSR committee.
and Audit

1.2.5 What constitutes CSR activities?

As per schedule VII, the following activities may be included by companies
in their CSR policies:

a) Eradicating hunger, poverty and malnutrition, promoting preventive

health care and sanitation and making available safe drinking water.
b) Promoting education, including special education and employment
enhancing vocation skills especially among children, women, elderly,
and the differently abled and livelihood enhancement projects.
c) Promoting gender equality, empowering women, setting up homes and
hostels for women and orphans; setting up old age homes, day care
centres and such other facilities for senior citizens and measures for
reducing inequalities faced by socially and economically backward
groups.
d) Ensuring environmental sustainability, ecological balance, protection of
flora and fauna, animal welfare, agroforestry, conservation of natural
resources and maintaining quality of soil, air and water.
e) Protection of national heritage, art and culture including restoration of
buildings and sites of historical importance and works of art; setting up
public libraries; promotion and development of traditional arts and
handicrafts.
f) Measures for the benefit of armed forces veterans, war widows and their
dependents.
g) Training to promote rural sports, nationally recognized sports, para
Olympic sports and Olympic sports.
h) Contribution to the Prime Minister’s National Relief Fund or any other
fund set up by the Central Government for socio‐economic
development and relief and welfare of the Scheduled Caste, the
Scheduled Tribes, other backward classes, minorities and women.
i) Contributions or funds provided to technology incubators located within
academic institutions which are approved by the Central Government.
j) Rural development projects.

Note: These activities undergo change from time to time as per

government’s orders.

Illustration 3

From which Financial Year does CSR expenditure and reporting begin?

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Answer CSR Accounting

Every company which meets the criteria specified under sub-section (1) of
section 135 is required to comply with CSR rules with effect from April 01,
2014. Companies must undertake CSR activities and spend the amount as
required under section 135 during the F.Y. 2014-15 and reporting of the same
would be done in 2015 Board’s Report.

Accordingly, amongst other things, the constitution of a CSR committee,

preparation of CSR policy, the spending of an amount on CSR activities
needs to be done during the financial year 2014-15.

Expenditure on CSR Activities which Qualify as CSR Expenditure

a) Only CSR activities undertaken in India shall amount to CSR

Expenditure.
b) CSR activities can be undertaken by a company, either as new or as on-
going projects/programmes/activities as per its CSR Policy, but
excluding activities which the company would carry on in its normal
course of business.
c) CSR activities can be carried out in collaboration with other companies
in such a manner that the CSR Committees of respective companies are
in a position to report separately on such CSR activities undertaken.

Illustration 5

How can companies with small CSR funds take up CSR activities in a
project/ programme mode?

Solution

Companies can combine their CSR programmes with other similar

companies by pooling their CSR resources. As per Rule 4 of the CSR Rules,
a company may collaborate with other companies for undertaking projects or
for CSR activities in such a manner that the CSR committees of the relevant
companies are in a position to report separately on such projects in
accordance with the prescribed Rules.

Expenditure on Which CSR Activities do not Qualify as CSR

Expenditure

The following activities are not considered as CSR in accordance with

section 135 of the Act.

• Activities that benefit only the employees of company and their families
shall not be considered as CSR activities
• One off events such as marathons/ awards/ charitable contribution/
advertisement/ sponsorships of TV programmes, etc., would not qualify
as CSR expenditure.
291
CSR Accounting • Expenses incurred by companies for the fulfilment of any Act/ Statute of
and Audit
regulations (such as Labour Laws, Land Acquisition Act, etc.) would not
count as CSR expenditure under the Companies Act.
• Contribution of any amount directly or indirectly to any political party
shall not be considered as a CSR activity.
• Activities undertaken by the company in pursuance of its normal course
of business.

Illustration 6

PQR Ltd. manufactures office stationaries like pens, pencils, erasers,

highlighters, etc. As part of its CSR policy, it has decided that for every
pack of these goods sold, INR 0.50 will go towards the ‘Educate India
Foundation’ which will qualify as a CSR spend as per Schedule VII.
Consequently, at the end of the year, the company sold 50,000 such packs
and a total of INR 25,000 was recognized as CSR expenditure. However,
this amount was not paid to the Foundation at the end of the financial year.
Will the amount of INR 25,000 qualify as CSR expenditure?

Solution

An amount earmarked out of sale for CSR activities cannot be treated as

CSR expenditure. The amount must actually be spent to qualify as CSR
expenditure. Hence, INR 25,000 will not be automatically considered as
CSR expenditure until and unless it is spent on CSR activities.

Activity 1

Visit the CSR Department of a company and find out what are the CSR
expenses made by the company and list out the activities under which
these expenses were made.

………………………………………………………………………………

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Check Your Progress - 1 CSR Accounting

Notes: a) Write your answers in about 50 words.

b) Check your answer with possible answers given at the end of the
unit.

1. What do you understand by Turnover?

……………………………………………………………………………
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2. Expenditure on which CSR activities qualifies as CSR expenditure?
……………………………………………………………………………
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1.3 CSR EXPENDITURES

1.3.1 CSR – Spending
Companies covered under section 135 are required to spend at least 2% of
average net profits during the three immediately preceding financial years. A
few important points of CSR spending are as follows:

a) A company shall give preference to the local area and areas around it
where it operates, for spending the amount earmarked for CSR activities.
b) In case of multi-locational operations, company could exercise discretion
in choosing the area for which it wants to give preference.
c) Where the company fails to spend such amount, the Board shall, in its
report, specify the reasons for not spending the amount.
d) The CSR committee shall formulate and recommend CSR policy to the
Board.
e) CSR policy shall indicate the activities to be undertaken by the company
as specified in Schedule VII.
f) The CSR Committee shall recommend the amount of expenditure to be
incurred on activities referred in CSR Policy
g) The CSR Policy of the company shall be monitored by the CSR
committee from time to time. 293
CSR Accounting h) Contribution in kind is not considered as CSR because to qualify as a
and Audit
CSR activity the company has to spend the amount.
i) Salary paid by the companies to regular CSR staff as well as employees,
who render their services for CSR, will be part of administrative
overheads and should not exceed 5% of the total CSR expenditure as per
rule 4(6) of CSR Rules 2014.
j) The Finance Act, 2014, provides that any expenditure incurred by an
assessee on CSR activities is not permitted as business expenditure
incurred for computation of taxable business income.
k) Contributions to the Prime Minister’s Relief Fund, scientific research,
rural development projects, skill development projects, agricultural
extension projects, etc., which finds place in Schedule VII, already enjoy
exemptions under different sections of the Income Tax Act, 1961. Hence
no specific tax exemptions have been extended to CSR expenditure per
se.
l) A holding company or subsidiary of a company which already fulfils the
CSR criteria under section 135(1) doesn’t make the company liable to
comply with section 135, unless the company itself fulfils the criteria.
m) A foreign company is not required to prepare a directors report. Yet it is
mandatory for a foreign company to report on CSR.
n) Contribution to Corpus of a Trust/ Society/ Section 8 companies, etc.,
will qualify as CSR expenditure as long as it is created exclusively for
undertaking CSR activities.
o) If a company spends in excess of the mandatory minimum ‘2% of
average net profits of immediately preceding three years’ the excess
amount cannot be carried forward against the CSR expenditure required
to be spent in future.

Illustration 7

Sri Lanka suffered immense loss due to a cyclone. An Indian pharmaceutical

company undertook various commercial activities with considerable
discounts and concessions in the affected areas of Sri Lanka for a continuous
period of 3 months after the cyclone. Management has shown in its Financial
Statements for the year 2018-19, as CSR expenditure incurred on such
activity. State whether this action taken by the management of the company
is correct. Explain with reasons.

Solution

The Companies Act, 2013 mandated that activities carried out in the
ordinary course of business cannot be treated as CSR expenditure. Hence
commercial activities carried out at concessional rates are nothing but the
ordinary course of business activities of the company. Therefore, the
294 financial treatment of showing the expenditure incurred on such
commercial activities as CSR expenditure, is incorrect. Additionally, CSR CSR Accounting
statutory guidelines require deployment of funds for the development and
benefit of local area of the Company. Since expenditure is incurred in Sri
Lanka, i.e., another country, it shall not qualify as CSR expenditure.

Following are the details of CSR spending by companies listed on NSE and
the top 10 countries with highest amount spent on CSR for FY 2017-18.

Table 1: CSR spending by companies listed on National Stock Exchange

(NSE) for 4 years from 2014-15 to 2017-18

CSR spending by companies 2017-18 2016-17 2015-16 2014-15

listed on NSE
Average Net Profit of last 3 years 5,35,353 4,80,069 4,51,744 4,09,714
(INR crore)
Amount Required to be spent 10,686 9,688 9,103 8,214
(INR crore)
Amount Decided to be spent 10,886 9,954 9,280 8,388
(INR crore)
Amount Unspent (INR crore) 1,717 1,574 1,891 2,455
Final Actual Amount spent (INR 10,030 9,060 8,418 6,461
crore)
CSR spend as a % of Net Profit 1.87 1.89 1.86 1.58

Source: nseinfobase.com

Table 2: Top 10 companies with highest amount spent on CSR for FY 2017-18

Company Names Avg. net CSR Amount CSR

profit for expenditure spent on amount
last 3 to be CSR unspent
years incurred activities (In Rs.
(In Rs. (In Rs. (In Rs. Million)
Million) Million) Million)
Reliance Industries Ltd. 351,541.90 7,030.80 7,450.40 -
Oil & Natural Gas 24,352.00 4,870.40 5,034.40 -
Corpn. Ltd.
Tata Consultancy 248,680.00 4,970.00 4,000.00 970.00
Services Ltd.
H D F C Bank Ltd. 182,460.00 3,650.00 3,740.00 -
Indian Oil Corpn. Ltd. 163,971.10 3,279.40 3,279.40 -
Infosys Ltd. 155,130.00 3,102.50 3,126.00 -
I T C Ltd. 145,234.00 2,904.70 2,909.80 -
N T P C Ltd. 110,373.00 2,207.50 2,415.40 -
Tata Steel Ltd. 42,809.60 856.20 2,316.20 -
Wipro Ltd. 91,647.00 1,833.00 1,866.00 -
295
CSR Accounting 1.3.2 Measurement of CSR expenditure
and Audit
a) In case the CSR expenditure incurred by a company results in building
an asset, then should this be recognised as an asset by the company in its
balance sheet? As per the Institute of Chartered Accountants of India
(ICAI) an ‘asset’ is a ‘resource controlled by an enterprise as a result of
past events from which future economic benefits are expected to flow to
the enterprise’. Hence, in cases where the control of the asset is
transferred by the company, e.g., a school building is transferred to a
gram panchayat for running and maintaining the school, it should not be
recognised as an asset in its books. Rather it should be treated as CSR
expenditure and must be reflected in the statement of profit and loss of
the company, as and when incurred.
b) Alternately, if the company retains control of the asset then it is
important to examine as to whether any future economic benefits would
be available to the company or not. Economic benefits from those assets
irrespective of whether they are owned and operated by the company or
transferred to a third party, shall not accrue to the company. Invariably,
future economic benefits from a CSR asset would not flow to the
company as any surplus from CSR cannot be included by the company in
business profits as per Rule 6(2) of the Companies (Corporate Social
Responsibility Policy) Rules, 2014.
c) A company might supply goods manufactured by it or render services as
CSR activities. In such cases, expenditure incurred should be recognised
only when the control on goods manufactured by it is transferred or
allowable services are rendered. Manufactured goods and services
rendered should be measured at cost including GST and that will be the
total CSR expenditure.
d) If a grant is received by a company for carrying out CSR activities, then
CSR expenditure should be measured net of the grant.
e) Contribution to a fund specified in the Schedule VII of the 2013 Act, by
a company will be treated as CSR expense for the year.
f) If a company incurs expenditure on CSR activities through a trust,
society, etc., as per Rule 4(2), it should be treated as CSR expense.

Illustration 8

Can money donated to a trust by a company be treated as CSR expenditure of

the company?

Answer

Contribution to the corpus of a trust/ society/ Section 8 companies, etc., will

qualify as CSR expenditure as long as (a) the trust/ society/ Section 8
companies, etc., is created exclusively for undertaking CSR activities, or (b)

296
where the corpus is created exclusively for a purpose directly relatable to a CSR Accounting
subject covered in Schedule VII of the Act

Illustration 9

There are certain corporate groups who run hospitals and educational
institutions. Will this be considered as a CSR activity?

Answer

If the hospitals and educational institutions are part of business activity of the
company they would not be considered as CSR activity. However, if some
charity is done by these hospitals or educational institutions, without any
statutory obligation to do so, then it can be considered as CSR activity.

1.3.3 Key tax benefits of CSR expenditure

The CSR expenditure does not specifically qualify for exemptions under the
Income Tax Act, 1961. However, certain activities forming part of Schedule
VII of Companies Act, 2013 are covered under tax exemptions. For example,
spending on certain activities such as the Prime Minister’s National Relief
Fund, scientific research, rural development projects, skill development
projects, agricultural extension projects, etc., (part of the Schedule VII to the
2013 Act) would be eligible for exemptions under the Income Tax Act, 1961
(IT Act).

Activity 2

Visit the accounts section of any Company doing CSR and ask them about
the tax benefits of CSR expenditure availed by them and write below.

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1.3.4 Presentation and Disclosures of CSR Activities in

Financial Statements
A company within the ambit of CSR provisions has to provide following
disclosures:

• Financial statements
Companies must disclose the CSR expenditure incurred as a note to the
statement of profit and loss. Guidance note on CSR activities must be
presented in profit and loss account as a separate line item under the head
‘CSR expenditure’. A detailed note on components of CSR expenses 297
CSR Accounting along with provision if any created for unspent CSR amount must be
and Audit
clearly reported. Notes to accounts relating to CSR expenditure should
also contain the following:

a) Gross amount required to be spent by the company during the year.

b) Amount spent during the year on:

In cash Yet to be paid in Total

cash
(i) Construction/acquisition of any
asset
(ii) On purposes other than (i)above

• Cash flow statement

Companies must disclose the expenditure incurred on CSR provisions as
notes to cash flow statement.
• Board of Director’s Report
It should include the details about the policy developed and implemented
by the company on CSR initiatives along with the annual report on CSR
undertaken during the year. A company is required to display these
reports on the company’s website, if any. A foreign company should also
contain an annexure regarding the report on CSR in its balance sheet
(filed under Section 381(1)(b) of the 2013 Act).

1.3.5 Accounting treatment of CSR expenditure

As per 2013 Act, expenditure on CSR activities, is to be disclosed in the
board of director’s report. If there is a shortfall in spending on CSR activities
below the prescribed threshold, the director’s report should disclose the
reasons for not spending the prescribed amount as per the 2013 Act.

In case a company spends more than the prescribed threshold of two per cent
on the CSR activities in a particular year, then such excess amount spent
cannot be carried forward to subsequent years in the books of account for set
off against the CSR expenditure required to be spent in the future.

Illustration 10

PQR Company is covered under CSR rules. An amount of INR 17,00,000

was spent on CSR activity towards environmental protection. Average net
profit of this company for the past three years was INR 80,00,000. Since
the Company incurred a CSR expense in excess of what is required by the
rules, it decided to utilize this expense as a carry forward to the next year
and reduce next year’s CSR spend by INR1,00,000. Can the excess
expenditure towards CSR be carried forward to next financial year?

298
Answer CSR Accounting

There is no provision for carrying forward the excess CSR expenditure

spent in a particular year. Any expenditure over 2per cent could be
considered as voluntary higher CSR spend for that year.

1.3.6 Accounting treatment of income arising from CSR

activities
Recognition of income if any earned from CSR projects or during the course
of conduct of CSR activities, requires application of Rule 6(2). This rule
clearly states that any surplus arising out of CSR projects or programmes or
activities would not form part of business profits of a company, since such
surplus does not arise out of ‘ordinary course of business’. The surplus
should immediately be recognized as a liability for CSR expenditure in the
balance sheet and recognized as a charge to the statement of profit and loss.
So, in order to compute the limit of two per cent of average net profits criteria
as per Section 135 of 2013 Act, such surplus would not be included in the
computation.

1.4 IMPACT OF CSR PROVISION

The Companies Act 2013 was much awaited. With the new Act coming into
force, lots of new provisions came in picture. One such new provision was
relating to CSR activities. This provision was much debated. Many
companies said that this new provision will create financial burden on them
as they need to spend specified percentage of their profits. Now, since the
new Act is in force, every company is following the new regulation.
Considering the intent of law that companies take so many resources from
society they should give back something to it, the provision of CSR is
justified. Also, there are few good points for Companies like:

1. The companies can spend less than specified percentage. In such case the
board need to disclose the reason for lower spending in its report.
2. The Institute of Chartered Accountants of India (ICAI) also issued a
guidance note that clarifies that no provision is required in books of
companies for CSR spending. The need is to book only actual
expenditure.

Also, the above spending will help in benefitting the underprivileged who are
deprived of basic necessities. In long run the society as a whole would surely
stand benefitted from it. In cost benefit analysis of this provision, its sure that
its benefit will far exceed its cost.

Illustration 11

a) A property is being constructed to operate CSR activities by a company.

At the balance sheet date, the cost of construction is treated as revenue
expenditure. Are there any additional disclosures required in the 299
CSR Accounting financials regarding this?
and Audit
b) During 2015, XYZ Ltd. falls under the purview of CSR provisions since
its net profit for the financial year exceeded Rs.5 crore. Company
discharged CSR obligations in the year 2016. However, the net profit of
the year 2016 was less than Rs.5 crores. Also, it was also not satisfying
the other two criteria of section 135 for CSR compliance. Therefore,
XYZ company stopped performing CSR activities from the year 2017
onwards. Comment on the company’s accountability for CSR.

Answers

a) Item 5 (a) of the General Instructions for Preparation of Statement of

Profit and Loss under Schedule III to the Companies Act, 2013, requires
that in case of companies covered under Section 135, the amount of
expenditure incurred on ‘Corporate Social Responsibility Activities’
shall be disclosed by way of a note to the statement of profit and loss.
Note should also disclose the details with regard to the expenditure
incurred in construction of a capital asset under a CSR project.
b) Once a company has fulfilled the net worth / turnover / net profit
criterion for one year it has to fulfil its CSR obligations for the
subsequent three financial years, even if it does not fulfil any of these
criteria in those years. In the given case XYZ Ltd. falls in the ambit of
CSR obligations by fulfilling the criteria of net profit exceeding Rs.5
crores in the year 2015. So it has to discharge its CSR obligations by
spending two percent of its average profit every year starting from 2016
till 2018. It cannot stop spending on CSR activities as per the Act after
2016 until the average net profit of preceding three years becomes zero
and it also doesn’t fulfil the other two criteria.

1.5 CESSATION FROM COMPLIANCE OF CSR

Every company which ceases to be a company as per the Act for three
consecutive financial years shall not be required to –

a) constitute a CSR Committee; and

b) comply with the provisions till such time it meets the criteria specified
under section 135.

A four year lock in period is applicable for a company fulfilling CSR

criterion in one financial year. It may be noted that once a company has
fulfilled the net worth / turnover / net profit criterion for one year it has to
fulfil its CSR obligations for the subsequent three financial years, even if it
does not fulfil any of these criteria in those years.

For example, if ABC Ltd. fulfils the turnover criterion under section 135(1)
in the financial year 2015-16, it would continue to be within the scope of
section 135(1) for the three financial years from 2016-17 to 2017-18,
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irrespective of fulfilment or otherwise of any criterion in those years. If it CSR Accounting
has not fulfilled any of the three criteria in the three subsequent financial
years, it would be outside the scope of CSR in the financial year 2018-19.
If in any of the three intermittent years, its average net profit figure is
negative, it need not comply with the CSR requirement for that year.

Particulars F.Y. F.Y. F.Y. F.Y. F.Y.

2015 -16 2016 -17 2017- 18 2018 -19 2019 -20
Net Worth / √ × × × ×
Turnover
/ Net Profit
Criterion
Situation I
Average Net Positive Positive Positive Positive Positive
Profits
CSR Obligation √ √ √ √ ×
Situation II
Average Net Positive Positive Positive Negative Positive
Profits
CSR Obligation √ √ √ × ×

Illustration 6

If a company with a turnover of Rs.1000 crores or more has incurred loss

in any of the preceding three financial years, then is the company required
to comply with the provisions of the section 135 of Companies Act, 2013?

Answer

As per the provisions of section 135 of the Act, one of the three criteria
has to be satisfied to attract Section 135. Therefore, if a company satisfies
the criterion of turnover, although it does not satisfy the criterion of net
profit, it is required to comply with the provisions of Section 135 and the
Companies (CSR Policy) Rules, 2014. But, since there were no profits, the
company did not spend any amount on CSR activities it must explain the
reasons for not spending any amount in its Board’s reports.

Check Your Progress - 2

Notes: a) Write your answers in about 50 words.

b) Check your answer with possible answers given at the end of the
unit.
1. What are the tax benefits of CSR expenditure?
……………………………………………………………………………
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CSR Accounting ……………………………………………………………………………
and Audit
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
2. How should the income arising from CSR activities be treated?
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………

1.6 LET US SUM UP

The main goal of social responsibility accounting is to evaluate whether
organizations have met their social responsibilities adequately or not. Social
responsibility accounting must include revealing information to beneficiaries,
providing feedback for management, and improving social footprints of its
projects. In this unit you have read about CSR components of Companies Act
from CSR accounts perspective. The unit also discusses what CSR pending is
and how CSR expenditure is measured. The impact of CSR provisions has
also been discussed. Finally, the conditions for cessation of compliance of
CSR have also been discussed.

1.7 KEYWORDS
Turnover: Turnover is the total sales made by a business in a certain period.
It is sometimes referred to as 'gross revenue' or 'income'.

Net worth: Net worth is the value of the assets a person or corporation owns,
minus the liabilities they owe.

Average Net Profit: Net profit refers to the amount of money left in the
company following the deduction of all expenses from the total sales made.

Financial Statement: Financial statements are written records that convey

the business activities and the financial performance of a company. Financial
statements are often audited by government agencies, accountants, firms, etc.,
to ensure accuracy and for tax, financing, or investing purposes.

Cash Flow Statement: A cash flow statement is a financial statement that

summarizes the amount of cash and cash equivalents entering and leaving a
company. The cash flow statement measures how well a company manages
its cash position, meaning how well the company generates cash to pay its
debt obligations and fund its operating expenses.
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1.8 BIBLIOGRAPHY AND SELECTED CSR Accounting

READINGS
https://www.cagmc.com/accounting-for-corporate-social-responsibility-csr-
expenditure/
https://www.bcasonline.org/ContentType/Shailesh%20Haribhakti%20-
%20CSR%20(2).pdf
https://www.sciencedirect.com/science/article/abs/pii/S073746071500004X
https://indiacorplaw.in/wp-content/uploads/2016/01/38254asb27888csr.pdf

1.9 CHECK YOUR PROGRESS – POSSIBLE

ANSWERS
Check Your Progress – 1

Answer 1: Turnover means the aggregate value of the realization of amount

made from the sale, supply or distribution of goods or on account of services
rendered, or both, by the company during a financial year.

Answer 2: Expenditure on CSR Activities which Qualify as CSR

Expenditure are as follows

a) CSR activities undertaken in India only shall amount to CSR

Expenditure.
b) CSR activities can be undertaken by a company, either as new or as
ongoing projects/programmes/activities as per its CSR Policy, but
excluding activities which the company would carry on in its normal
course of business.
c) CSR activities can be carried out in collaboration with other companies
in such a manner that the CSR Committees of respective companies are
in a position to report separately on such CSR activities undertaken.

Check Your Progress – 2

Answer 1: The CSR expenditure does not specifically qualify for exemptions
under the Income Tax Act, 1961. However, certain activities forming part of
Schedule VII of Companies Act, 2013 are covered under tax exemptions. For
example, spending on certain activities such as the Prime Minister’s National
Relief Fund, scientific research, rural development projects, skill
development projects, agricultural extension projects, etc., (part of the
Schedule VII to the 2013 Act) would be eligible for exemptions under the
Income Tax Act, 1961 (IT Act).

Answer 2: Recognition of income if any earned from CSR projects or during

the course of conduct of CSR activities, requires application of Rule 6(2).
This rule clearly states that any surplus arising out of CSR projects or
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CSR Accounting programmes or activities would not form part of business profits of a
and Audit
company, since such surplus does not arise out of ‘ordinary course of
business’. The surplus should immediately be recognized as a liability for
CSR expenditure in the balance sheet and recognized as a charge to the
statement of profit and loss. So, in order to compute the limit of two per cent
of average net profits criteria as per Section 135 of 2013 Act, such surplus
would not be included in the computation.

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