CS Aisha Begum Ansari and Harsh Juneja (corplaw@vinodkothari.com )
Introduction
For the purpose of applicability of Accounting Standards (“AS”), The Institute of Chartered Accountants of India (“ICAI”) has classified the entities into two segments – company entities and non-company entities. Non-company entities such as sole proprietors, partnership firms, trusts, Hindu Undivided Families, association of persons and co-operative societies are further classified into various levels. Currently, the ICAI has categorized non-company entities into 3 levels.
With increasing number of non-company entities, the ICAI has, now, further classified them into 4 levels. The amendments have been brought to reduce stringency on non-company entities which were earlier required to comply with all AS in pursuance of being level I entities as the norms for the same have been revised.
Since most of the Special Purpose Vehicle(s) (“SPV”s) are in the form of non-company entities, they were required to comply with all accounting standards as most of these were covered under level I category. However, with the proposed changes, the burden of strict adherence to AS will be reduced for SPVs falling under level I category.
This Article is an attempt to cover the proposed revision criteria for application of AS on non-company entities.
Proposed applicability
It is proposed that this scheme be made effective in respect of accounting periods commencing on or after April 1, 2020. However, the same shall be effective once the required changes are incorporated in the AS while publishing the updated Compendium of AS.
Non-company entities[1] on which Ind AS is not applicable. It should be noted that such entities have been classified in 4 levels basis different criteria including turnover and borrowing and classified as large – medium – small and micro entities- last three referred to as MSMEs.
Entities belonging to level II, III, IV have been granted certain exemption. It is to be noted that the applicability of AS has been made milder as one goes down the four level of entities i.e to say, maximum relaxations / exemptions are given to level IV entities.
Disclosures
All non-company entities which are covered under this Proposal, are required to make following disclosures:
- That the AS has been complied by the entity;
- The level to which the entity belongs and whether it has availed exemptions granted to such level;
- Availing of partial exemption – It is to be noted that the entities are allowed to cherry-pick the exemptions they intend to avail. However, such partial availing of exemption should not be misleading. That the entity has cherry-picked the exemptions and not availed all the exemptions granted to such level should be disclosed as to which all exemptions it has availed;
Transition
The Proposal also talks about disclosure / rules of transition from one level to another, which are as follows:
- From transition from a higher level to a lower level – relaxations / exemptions of the lower level may be availed only on staying at such level for two consecutive years.
- From transition from a lower level to higher level – while the disclosures pertaining to the higher level becomes applicable, however no change / revision is required to be made in the previous year [where the entity was classified as a lower level, and had availed exemptions / relaxation as such] is required to be made. However, disclosure of such fact is required to be made in the notes to financial statement.
| Levels |
Existing criteria for classification [2019][2] |
New criteria for classification |
Applicability |
| I
[Large] |
1. Equity / Debt Listed / to be listed entity
a) Entities listed on overseas exchanges also included
2. Banks (including co-operative banks), FIs, Insurance entities
3. Entities having [3]turnover in the (excluding other income) > 50 crores
4. Borrowings (including public deposit) > 10 crores
5. Holding and subsidiary entities of the above |
1. Listed / to be listed entity
a) Entities listed on overseas exchanges also included
2. Banks (including co-operative banks), FIs, Insurance entities
3. Entities having turnover in the (excluding other income) > 250 crores
4. Borrowings (including public deposit) > 50 crores
5. Holding and subsidiary entities of the above |
All 29 AS applicable in full. |
| II [Medium] |
1. Entities having turnover in the (excluding other income) > 40 lakhs ≤ 50 crores
2. Borrowings (including public deposit) > 1 crores ≤ 5 crores
For turnover / borrowing criteria – only such entities shall be regarded which are engaged in commercial, industrial or business activities
Holding and subsidiary entities of the above |
1. Entities having turnover in the (excluding other income) > 50 crores ≤ 250 crores
2. Borrowings (including public deposit) > 10 crores ≤ 50 crores
For turnover / borrowing criteria – only such entities shall be regarded which are engaged in commercial, industrial or business activities
3. Holding and subsidiary entities of the above |
A. Accounting Standard(s) not applicable:
AS 3 – Cash Flow Statements
AS 17 – Segment Reporting
AS 20 – Earnings Per Share
B. Accounting Standard(s) applicable with disclosure exemption:
AS 19 – Leases
AS 28 – Impairment of Assets
AS 29 – Provisions, Contingent Liabilities and Contingent Assets
C. Accounting Standard(s) applicable with exemptions:
AS 15 – Employee Benefits
D. Accounting Standard(s) applicable with Note: [following AS, being related to CFS, the same is not applicable to Level II, III, IV entities unless they voluntary decide to consolidate the financial statements]
AS 21 – Consolidated Financial Statements
AS 23 – Accounting for Investments in Associates in Consolidated Financial Statements
AS 25 – Interim Financial Reporting
AS 27 – Financial Reporting of Interests in Joint Ventures (to the extent of requirements relating to Consolidated Financial Statements)
|
| III
[Small] |
Remaining non corporate entities |
1. Entities having turnover in the (excluding other income) > 10 crores ≤ 50 crores
2. Borrowings (including public deposit) > 2 crores ≤ 10 crores
For turnover / borrowing criteria – only such entities shall be regarded which are engaged in commercial, industrial or business activities
3. Holding and subsidiary entities of the above |
All exemptions provided to Level II shall be applicable. Further exemptions:
A. In addition to full exemptions as given in Level II, further Accounting Standard(s) not applicable:
AS 18 – Related Party Disclosures
AS 24 – Discontinuing Operations
B. In addition to disclosure exemption as given in Level II, further Accounting Standard(s) applicable with disclosure exemption:
AS 10 – Property, Plant and Equipment
AS 11 – The Effects of Changes in Foreign Exchange Rates |
| IV [Micro] |
There were only III levels |
Remaining non corporate entities |
All exemptions provided to Level III shall be applicable. Further exemptions:
A. In addition to full exemptions as given in Level III, further Accounting Standard(s) not applicable:
AS 14 – Accounting for Amalgamations
AS 28 – Impairment of Assets
AS 22 is applicable only for current tax related provisions.
B. In addition to disclosure exemption as given in Level III, further Accounting Standard(s) applicable with disclosure exemption:
AS 13 – Accounting for Investments |
Conclusion
As discussed above, the intent to revise the criteria for classification of non-company entities is to provide exemptions/ relaxations from applicability of all AS to certain entities covered under level I as they will now be shifted to descending levels. These proposed amendments will also lessen the difficulties faced by non-company entities falling under the existing levels as they will be provided with partial or full exemptions by getting transferred to descending levels.
[1]This Announcement supersedes the earlier Announcement of the ICAI on ‘Harmonisation of various differences between the Accounting Standards issued by the ICAI and the Accounting Standards notified by the Central Government’ issued in February 2008, to the extent it prescribes the criteria for classification of Non-company entities (Non-corporate entities) and applicability of Accounting Standards to non-company entities, and the Announcement ‘Revision in the criteria for classifying Level II non-corporate entities’ issued in January 2013.
[2] https://resource.cdn.icai.org/56169asb45450.pdf
[3] For turnover / borrowing criteria – only such entities shall be regarded which are engaged in commercial, industrial or business activities
