The new rules will replace existing rules issued in the year 2006 and are applicable from accounting periods commencing on or after 1st April 2021.
The government, in continuation of its theme as regards ease of doing business, has increased the limits for classification as Small & Medium Sized (SMC) companies. The objective is to reduce the compliance burden and the time required to prepare the financial statements. As a result of this notification, a significant number of companies would be covered in the definition of the SMC companies.
These amendments follow the recent changes made by the government to the Micro, Small and Medium Enterprises Development Act, 2006 wherein the upper cap of turnover for the purpose of registration was enhanced for micro, small and medium enterprises.
Need for this amendment
- The limits were not amended from many years and considering the overall growth in the economy it was imperative that the limits need to be increased. The benefit of this amendment would be available to a large number of companies.
- The number of accounting standards and disclosure requirements have increased over the years. These standards are being continuously revised to align with the international requirements. The implementation of these changes requires additional taskforce of accountants who understand the requirements.
- The time for preparation of the financial statements have increased substantially considering the various disclosure requirements. This has increased the compliance burden on the SMC companies also.
- As stated above, the definition for small and medium companies was amended in MSME Act. This change also helps in alignment of the definitions under both Acts to certain extent.
As per the new rules, for the purpose of categorization as a SMC, the upper cap for annual turnover has been increased to Rs 250 crores from Rs 50 crores and upper cap for borrowings has been increased to Rs 50 crores from Rs 10 crores. The new rules will replace existing rules issued 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:
- 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 upto Rs 50 lakhs and turnover upto Rs 2 crores, since beyond these limits, preparation of cash flow statement is mandatory under section 2(40) of the Companies Act 2013.
- Exemption from detailed disclosures which are required by the Accounting Standard 15 ‘Employee benefits’ and also there is a simplification in terms of valuation of the liability. This will reduce the cost incurred by the companies for actuarial valuation of the liability.
- The accounting standard requires detailed disclosures as regards operating lease as well as finance lease. The new rules exempt SMC companies from such disclosures.
- Disclosure of diluted earning 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 service of experts or valuers.
What does not change
These amendments has 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 a SMC, 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 account in shorter time as compared to large companies. However, the management certainly can voluntarily adopt not to avail such relaxations and exemptions so that their financial statements can be benchmarked with best practices followed.
The writer is Partner and Omprakash Shettigar, Manager at N. A. Shah Associates LLP.