small & medium-sized (smc: How relaxation in compliance norms will impact small companies
This amendment follows the recent changes made by the government to the Micro, Small and Medium Enterprises Development Act, 2006, wherein the upside limit of turnover requirements for registration was increased for micro, small and medium enterprises.
Why was this amendment so crucial?
These limits were not amended for years and considering the overall economic growth, it was crucial for these limits to be increased. The benefits of this amendment would be now available to a much bigger pool of companies.
The numbers of accounting standards and disclosure requirements have increased over the years. These standards are being continuously revised to align with international requirements. Implementing all these changes means the requirement of an additional taskforce of accountants.
The duration required to prepare financial statements has increased substantially considering the various disclosure requirements. This has also increased the compliance burden on SMC companies.
Key changes in the Act
As per the new rules, the upper limit of the annual turnover requirement for SMC categorization has been increased to Rs 250 crore from Rs 50 crore and the upside cap for borrowings has been increased to Rs 50 crore from Rs 10 crore. These new rules will replace existing rules set in the year 2006 and are applicable from accounting periods commencing on or after 1st April 2021.
Some of the key amendments, other than upper cap limits for categorization mentioned above, are listed below:
1. Exemptions
SMC is exempted from complying with Accounting Standard 3 ‘Cash flow statement’ and Accounting Standard 17 ‘Segment reporting’. However, exemption from AS 3 will be relevant only for companies who have paid-up capital up to Rs 50 lakh and turnover of up to Rs 2 crore. Beyond these limits, preparation of a cash flow statement is mandatory under section 2(40) of the Companies Act 2013.
2. Relaxations
Exemption from detailed disclosures which are required by the Accounting Standard 15 – ‘employee benefits’. Also, there is a simplification in terms of the valuation of the liability. This will reduce the cost incurred by the companies for the actuarial valuation of the liability.
The accounting standard requires detailed disclosures with regards to operating lease as well as a finance lease. The new rules exempt SMC companies from such disclosures.
Disclosure of diluted earnings per share is not required.
For the purpose of impairment provision, management estimates can be used instead of present value techniques. In many cases, this will also reduce the cost of using the service of experts or valuers.
What does not change
These amendments have no impact on compliance requirements by listed companies, banks, financial institutions, and insurance companies who have to continue to comply with all accounting standards or Indian Accounting Standards as applicable. Further, as per the transition provisions, for enjoying the exemptions/relaxations available to SMCs, companies satisfying SMC criteria for the first time will have to wait for two consecutive accounting periods during which they will have to continue to fulfill SMC criteria.
The amendment will enable several small and mid-sized companies to close their books of accounts in a shorter time as compared to large companies. However, the management certainly can voluntarily adopt to not avail such relaxations and exemptions, so that their financial statements can be benchmarked with best practices followed.
(Prashant Daftary is a partner at N. A Shah Associates LLP & Omprakash Shettigar is Manager at N. A Shah Associates LLP. Views are their own)
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