Relief for small businesses: Relaxations in compliance with accounting standards
These changes follow recent government amendments to the Micro, Small and Medium Enterprises Development Act 2006, in which the turnover limit for registration purposes was increased for micro, small and medium enterprises.
Need for this amendment
- The limits have not been changed for many years and given the overall growth of the economy, it was imperative that the limits be increased. The benefit of this amendment would be accessible to a large number of companies.
- The number of accounting standards and disclosure requirements has increased over the years. These standards are continually revised to align with international requirements. Implementing these changes requires an additional working group of accountants who understand the requirements.
- The time required to prepare financial statements has increased considerably given the various disclosure requirements. It has also increased the compliance burden for SMC companies.
- As mentioned above, the definition of small and medium-sized enterprises has been changed in the MSME law. This change also helps to harmonize the definitions of the two acts to some extent.
In line with the new rules, for the purpose of categorization as an SMC, the upper ceiling for annual turnover has been raised to Rs 250 crores from Rs 50 crores and the upper ceiling for borrowings has been raised to Rs 50 crores instead of Rs 10 crores. The new rules will replace the existing rules published in 2006 and are applicable from accounting periods beginning on or after April 1, 2021.
Some of the major changes, other than the upper caps for categorization mentioned above, are listed below:
- SMC is exempted from complying with accounting standard 3 ‘Statement of cash flows’ and accounting standard 17 ‘Segment reporting’. However, the AS 3 exemption will only be relevant for companies that have contributed capital up to Rs 50 lakhs and turnover up to Rs 2 crores, as beyond these limits, the Preparation of a cash flow statement is mandatory under Section 2(40) of the Companies Act. 2013.
- Exemption from detailed information required by accounting standard 15 “Employee benefits” and there is also a simplification in terms of the valuation of liabilities. This will reduce the cost incurred by companies for the actuarial valuation of liabilities.
- The accounting standard requires detailed information on both operating leases and finance leases. The new rules exempt SMC companies from such disclosures.
- Disclosure of diluted earnings per share is not required.
- For the purposes of the provision for impairment, management’s estimates may be used in lieu of present value techniques. In many cases, it will also reduce the cost of engaging the services of experts or evaluators.
What does not change
These amendments have no impact on the compliance requirements of listed companies, banks, financial institutions and insurance companies which must continue to comply with all accounting standards or Indian accounting standards, as the case may be. In addition, in accordance with the transitional provisions, in order to benefit from the exemptions/relaxations available to an SMC, companies satisfying the SMC criteria for the first time will have to wait for two consecutive accounting periods during which they must continue to satisfy the SMC criteria.
The amendment will allow many small and medium-sized businesses to close their books faster than large businesses. However, management can certainly voluntarily choose not to avail themselves of these relaxations and exemptions so that their financial statements can be compared to the best practices followed.
The author is partner and Omprakash Shettigar, principal at NA Shah Associates LLP.