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Impact of Corporate Social Responsibility (CSR) on Financial Reporting
By Vishal Divadkar Partner MZSK & Associates (BDO International network firm)

Applicability of CSR

The new Companies Act, 2013 introduced Section 135 which mandates CSR activity for the companies meeting the thresholds below and is applicable from April 1, 2014:

a)    Net worth of INR 500 crores or

b)    Turnover of INR 1000 crores or

c)    Net profit of INR 5 crores


If any company on which CSR provisions were applicable cease to meet the above criteria for consecutive three years, they are not required to follow the provision of CSR.


Constitution of CSR committee

Every company fulfilling the above criteria shall constitute a CSR committee of the Board consisting of 3 or more directors, of which one shall be an independent director (if there is one). The Board after considering due recommendation of the CSR committee shall have to approve the CSR policy and also ensure that the activities included in CSR policy are undertaken.

Further, the contents of the CSR Policy shall be disclosed in the Board’s Report and should be placed on Company’s website.


The Amount to be Spent

The company shall spend, in every financial year, at least 2% of the Average Net Profits of the company made during the 3 immediately preceding financial years calculated in accordance with Section 198 of the Act.

How to Spend

The amount is to be spent on

  • Programs and activities specified in Schedule VII to the Act. Any such activities should not contravene any other prevailing laws of land
    • Preference is to be given to the local area where it operates
    • Programs and activities should be undertaken in India only
    • Programs and activities should not be exclusively for employees & their families
    • Administrative expenses can also be included


The amount is to be spent by

The company on its own through -

  • a company established under Section 8 of the Act or a registered trust or a registered society, established by the company, either singly or along with any other or
  • a company established under Section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government or any entity established under an Act of Parliament or a State legislature;
  • a company established under Section 8 of the Act or a registered trust or a registered society, other than those above mentioned in V above, then such Company or trust or society shall have an established track record of three years in undertaking similar programs or projects
  • collaboration or pooling of resources with other companies.


Implementation of CSR and impact on financial reporting and governance

India is the first country to mandate CSR by statute. The provisions are applicable to a large number of companies and therefore, it is imperative to develop effective monitoring mechanism in order that such expenditure yields intended results. This poses several challenges for companies who so far were not actively involved in CSR activities and/or disclosure of the same within their Annual reports.

  • The Companies will have to form a CSR Committee which should consist of people having experience in identifying, formulating and implementing appropriate CSR policies and strategies.
  • Continuous amendments wrt the provisions of CSR are posing difficulties to the Companies which lead to frequent changes in the CSR policies and strategies formulated by them in this regard and which may also jeopardize some of the activities initiated by the Company. There have been 5 amendments and circulars since the section was notified in March 2013.
  • As per the FAQ’s released by MCA, any amounts spent towards CSR activities cannot be claimed as business expenditure. The Finance Act, 2014 provides that any expenditure incurred u/s 135 shall not be deemed to be an expenditure incurred for the purposes of business or profession. However, while no specific tax exemptions are extended to CSR expenditure, contributions to Prime Ministers Fund, scientific research, rural development projects, skill development projects, etc., enjoy the exemptions under Income Tax Act, 1961, which may be claimed by the company under those sections due to lack of clarity.
  • CSR expenses incurred by a company which are capital in nature are not eligible to be claimed as deductible expenses under Section 37 of the Income Tax Act, 1961. The essence of Section 37 of Income Tax Act, 1961 is that expenses must be incurred wholly/inclusively for business of the tax payer.
  • In case there are shortages in spending the amount in the current year, a company is not allowed to create a provision for the shortfall in the books of account as there is no present obligation as per applicable Accounting Standards. However, if a company has already undertaken certain CSR activity for which a contractual liability has been incurred, a provision for the requisite amount payable to record that liability needs to be recognized as per the applicable Accounting Standards. The company is entitled to disclose in their Annual Reports of subsequent years any such excess spending of previous years while giving reasons for not spending in those later years. The term contractual liability is neither clearly defined nor there is any guidance available on the same.
  • As the amount spent in excess of the requisite amount is not allowed to be carried forward by the company, it may discourage spending.
  • If the requisite amount is unspent as at the end of the year, the Board of Directors in their Director’s Report have to disclose this fact. Non-disclosure in the report attracts penalty and not non-spending.
  • In case the Company has spent less than 2% as specified in Section135, the Board of the Company is free to decide whether such unspent amount is to be carried forward to the next year. However, this amount should be over and above the next year’s CSR allocation as per provisions of Section 135.
  • There is no clarity wrt calculation of average profits in certain cases; for instance,

              - the company has incurred losses in any of the 3 preceding previous years

            - the loss in one of the years out of the 3 years for which average profits are to be calculated is of such an amount, that there is no residual profit after setting off profits of other 2 years.

Guidelines for Reporting by Board of Directors are elaborated in the Companies (Corporate Social Responsibility Policy) Rules, 2014.

Guidelines for Reporting in the Financial Statements are elaborated in the Guidance Note on CSR issued by ICAI:

  • The expenditure incurred should be recognized as a separate line item as ‘CSR expenditure’ in the statement of profit and loss

  • 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 which 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:


Sr. No.


In Cash

Yet to be paid in cash



Construction /acquisition of any asset





On purposes other than (i) above





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