Impact of New Companies Rules, 2021
Under the Companies Act of 2013, the Ministry of Corporate Affairs released the Companies (Indian Accounting Standards) Rules, 2021 on June 23rd, 2021. The National Financial Reporting Authority was consulted before issuing such a notice (NFRA). Accounting requirements, updated classifications of small and medium-sized businesses (SMCs), and relaxations granted to these SMCs are all part of these laws.
We aim to explain the key changes brought about by the new rules, as well as their impact, in this blog. The Companies (Accounting Standards) Rules 2006 are being replaced by the new rules. They are a collection of accounting standards that SMCs can employ to generate general-purpose financial statements.
Date of Applicability of the Companies Accounting Standards Rules, 2021
Larger firms utilize the Indian Accounting Standards (Ind AS), which are quite similar to the International Financial Reporting Standards (IFRS) used in most industrialized nations. The accounting standards for SMCs, which were notified in December 2006 and revised from time to time, are significantly easier than Indian Accounting Standards (Ind AS). The application of these accounting standards is less complicated, and there are fewer necessary disclosures.
The Companies (Accounting Standards) Rules, 2021, will take effect on April 1, 2021, and will apply to accounting periods commencing on or after that date.
The Institute of Chartered Accountants of India (ICAI) has recommended Accounting Standards 1 to 5, 7, and 9 to 29, which are mentioned in the Annexure to the Central Government’s regulations. When compiling financial statements, certain Accounting Standards must be observed.
Definition of SMC
A new definition of SMCs has been included in the notice. The revised SMC definition raises the turnover and borrowing limitations from Rs 50 crore to Rs 250 crore, respectively. Additionally, such businesses must be unlisted and not banks, financial institutions, or insurance companies.
A Small and Medium-Sized Company (SMC) is defined as follows under the new Companies (Accounting Standards) Rules, 2021:
An SMC is a business:
Whose equity/debt securities are not listed or in the process of being listed on any stock exchange in India or abroad, Whose turnover (excluding other income) in the previous accounting year was not more than 250 crore rupees, Whose loans/borrowings (including public deposits) were not more than 50 crore rupees at any point during the previous accounting year, and Whose is not a hologram
If all of the requirements stated above are satisfied after the relevant accounting period, a firm qualifies as a Small and Medium-Sized Company, according to legislation.
- Let’s look at an example of what comprises other income, as mentioned in point 2. Because it is not an operational activity of a firm, profit on the sale of Property, Plant, and Equipment should be classified as other income rather than other operating revenue. Manufacturing scrap sold as a result of activities for a manufacturing firm, on the other hand, should be categorized as other operating revenue because it is connected to the company’s main business.
- The aforementioned turnover requirements must be applied to the preceding fiscal year, i.e., if a business is assessing whether or not it is an SMC for the fiscal year 2021-22, the turnover for the fiscal year 2020-21 must be taken into account.
- Although the word “borrowings” is not defined in these Rules, it will encompass all loans, debentures, bonds, and other financial instruments issued by the firm, as well as public deposits.
- Unlike the turnover limit, the borrowing threshold restriction is based on funds borrowed at any time during the preceding fiscal year. As a result, even if a company’s year-end balance was less than Rs. 50 crores, it would be classed as non-SMC if it had borrowed more than Rs. 50 crores but returned some of the debt before the end of the year.
Accounting Standards Rules for Companies, 2021: Obligation to Follow Accounting Standards
Except for firms that are subject to the Indian Accounting Standards as notified under the Companies (Indian Accounting Standards) Rules, 2015, all other companies and their auditors must adhere to the new Accounting Standards.
In other words, the Businesses (Accounting Standards) Rules, 2021 will apply to non-Ind AS organizations, i.e., companies that are not required to follow the Companies (Indian Accounting Standard) Rules, 2015.
SMCs should be exempted or given some leeway.
Many exemptions are available to small and medium-sized businesses that are not accessible to larger businesses. They are completely excluded from submitting cash flow statements and segmental analysis of their financial performance in required filings.
SMCs are exempt from Accounting Standard 3 (Cash flow statement) and Accounting Standard 17 (Segment reporting). They do not apply to SMCs. Accounting Standard 3 will, however, be excluded only for firms with a paid-up capital of up to Rs. 50 lakhs and revenue of up to Rs. 2 crores. Section 2(40) of the Companies Act 2013 mandates the development of a cash flow statement beyond certain limits.
SMCs are also exempt from certain of the extensive disclosures required by Accounting Standard 15 – ‘Employee Benefits.’ Furthermore, they are exempt from certain specific disclosures in the case of an operating lease and a financing lease.
Furthermore, SMCs are exempt from disclosing diluted profits per share (DPS). Diluted earnings per share reflect a company’s profits per share if all options to convert other securities into shares are exercised.
SMCs can also estimate the value of assets in their balance sheets, and they aren’t required to utilize present value techniques to do so. The asset’s value in use is the present value of future cash flows resulting from the continuing use of an asset and its eventual disposal at the end of its useful life. Larger businesses, on the other hand, are required to apply present value techniques and report the discount rates used to determine an asset’s value.
For impairment provision, management estimates may be utilized instead of present value techniques. This will also save money on the services of an expert or a valuer in many cases.
How do these rules affect SMCs?
The announcement is designed to assist small and medium-sized businesses (SMCs) in revising their turnover and borrowing limits, as well as simplifying disclosure obligations.
The objective is to reduce the time it takes to prepare financial statements while simultaneously reducing the amount of compliance work required. As a result of this declaration, a substantial number of companies will be classified as SMCs. As a result, a wider range of firms would be able to benefit from more accounting standard flexibility.
The government’s recent changes to the Micro, Small, and Medium Enterprises Development Act, 2006, which also increased the upside limit of turnover requirements for registration for micro, small, and medium enterprises, prompted this amendment through the Companies (Accounting Standards) Rules, 2021.
Reason of importance
These SMC limitations had not been adjusted in years, and given the current state of the economy, they needed to be raised. A far wider number of firms would now be able to profit from this modification.
In addition, throughout time, the number of accounting rules and disclosure obligations has grown. These standards are updated regularly to ensure that they satisfy international requirements. All of these developments demand the creation of a new accounting task force.
The time it takes to create financial statements has grown considerably as a result of the different disclosure requirements. As a result, the compliance burden on SMCs has also grown. This is why the Accounting Standards Rules for SMCs needed to be amended to allow a wider number of firms to benefit from exclusions.
Change of status of SMC
SMCs must follow the following directions to comply with the Accounting Standards, according to guidelines established by the Central Government:
- Change from Non-SMC to SMC status
Existing businesses that were not previously categorized as Small and Medium-Sized Companies (SMCs) but later became SMCs are not eligible for an exemption or relaxation from the SMC Accounting Standards until they have been classified as SMCs for two consecutive accounting periods.
- Change from SMC to Non-SMC status
When a company qualifies for an exemption or relaxation in the previous accounting period but no longer qualifies in the current accounting period, the relevant standards or requirements apply from the current period onwards, and the figures for the previous accounting period’s corresponding period do not need to be revised simply because it has ceded the relevant exemption or relaxation. According to the MCA, the fact that the company was an SMC in the previous period and that it took use of the SMC exclusions or relaxations must be appropriately reported in the notes to the financial statements.
- SMC’s disclosure
The government also stated that an SMC that does not disclose certain information due to exemptions or relaxations granted to it must disclose (via a note to its financial statements) that it is an SMC and that it has complied with Accounting Standards insofar as they apply to an SMC, such as, “The Company is a Small and Medium-Sized Company (SMC) as defined in the Companies (Accounting Standards) Rules, 2021 notified under the Companies Act, 2013,” As a result, the Company has followed the Accounting Standards for Small and Medium-Sized Businesses.”
Not opting for exemption
If an SMC chooses not to utilize any of the exemptions or relaxations available to it concerning many but not all of the Accounting Standards, it must declare which standard(s) the exemption or relaxation was used for.
Furthermore, if the SMC wishes to reveal any information that is not required to be reported because of an exemption or relaxation available to SMCs, it must do so in line with the applicable accounting rules.
What hasn’t changed?
These revisions have no impact on the compliance obligations of publicly traded corporations, banks, financial institutions, and insurance companies, which must continue to adhere to all relevant accounting standards including Indian Accounting Standards. Furthermore, under the transition rules, firms that fulfill SMC requirements for the first time must wait at least two accounting periods before benefiting from the SMC exemptions or relaxations.
Several small and medium-sized firms will be able to conclude their books of accounts in less time than major organizations as a result of the change. However, a company’s management might choose to forego such exclusions and relaxations so that its financial statements can be compared to best practices.