Higher thresholds for Small and Medium Companies

Context:

The Corporate Affairs Ministry has expanded the turnover and borrowing thresholds for Small and Medium sized Companies (SMC), allowing a larger number of firms to benefit from reporting exemptions under accounting norms.

Relevance:

GS-III: Indian Economy (Growth and Development of Indian Economy), GS-III: Industry and Infrastructure

Dimensions of the Article:

1. Companies (Accounting Standards) Rules, 2021
2. What are the changes in thresholds for SMCs?
3. Impact of these Changes

Click Here to read more about what are SMCs and their predicament

Companies (Accounting Standards) Rules, 2021

• The Ministry of Corporate Affairs has notified the Companies (Accounting Standards) Rules, 2021 which deals with small and medium companies to revise the turnover and borrowing limits and help in making disclosure requirements less onerous.
• The notification has included the revised definition of MSMEs. Under the revised SMC definition, the turnover limit has been increased from Rs 50 crore to not exceeding Rs 250 crore and with enhanced borrowing limits.
• This is in addition to the requirements that such entities should be unlisted companies, which are not banks, financial institutions, or insurance companies.
• Every company, other than companies on which Indian Accounting Standards as notified under Companies (Indian Accounting Standards) Rules, 2015 are applicable, and its auditor(s) shall comply with the Accounting Standards.

What are the changes in thresholds for SMCs?

• The Corporate Affairs Ministry has increased the turnover threshold for SMCs to Rs 250 crore from Rs 50 crore, and the borrowing threshold to Rs 50 crore from Rs 10 crore.
• SMCs are permitted to avail a number of exemptions under the Company (Accounting Standards) Rules 2021 to reduce the complexity of regulatory filings for smaller firms.
• SMC are completely exempted from having to file cash flow statements and provide a segmental break up of their financial performance in mandatory filings.
• SMCs can also avail partial reporting exemptions in areas including reporting on employee benefits obligations such as pensions.
• SMCs are exempted from having to provide a detailed analysis of benefit obligations to employees, but are still required to provide actuarial assumptions used in valuing the company’s obligations to employees.
• SMCs are also exempted from having to report diluted earnings per share in their filings. Diluted earnings per share reflect the per share earnings of a company assuming that all options to convert other securities into shares are exercised.
• SMCs are also allowed to provide an estimated value in use of assets carried on their balance sheets, and are not required to use present value techniques to arrive at the value in use of assets. The value in use of an asset is the present value of future cash flows arising from the continuous use of an asset and from its disposal at the end of its useful life.
• Any SMC which opts to avail of any of the exemptions available to them under the Companies Accounting Rules is required to disclose those which it has utilised in its mandatory filings.

Impact of these Changes

• Experts have noted that the move would promote ease of doing business for the firms that would now be included under the definition of SMC.
• The increase in borrowing threshold from 10 to 50 crores comes as a huge relief considering the difficulties faced by SMCs during the Covid 19 Pandemic.
• The exemption from reporting diluted earnings per share will allow for some amount of alleviation to the adverse impact that the companies might face due to an abnormal drop in profits that are solely an impact of the unfair conditions during the pandemic.
• The Accounting Standards for SMC, which were notified in December 2006 and amended from time to time, are much simpler as compared to Indian Accounting Standards (Ind AS). These accounting standards involve less complexity in its application, including the number of required disclosures being less onerous. Ind AS standards are applied to larger firms, and are largely similar to International Financial Reporting Standards (IFRS) used in most developed jurisdictions.

-Source: The Hindu