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Accounting Standards for Small and Medium Sized Companies

Presented by S.C. Vasudeva, Partner

S.C. Vasudeva & Co. Chartered Accountants

Accounting Standards for Small and Medium Sized Companies

The applicability of Accounting Standard to Smalland Medium Sized Enterprises has been notified bythe Companies (Accounting Standards) Rules 2006under the Companies Act 1956. Such enterprisesfor the purposes of Companies Act 1956 have beenclassified as “Small and Medium Sized Companies”.In accordance with the definition contained in thesaid rule, a Small and Medium Sized Company(SMC) means, a company-

S.C. Vasudeva & Co., Chartered Accountants

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i. whose equity or debt securities are not listed or are not inthe process of listing on any stock exchange, whether inIndia or outside India;

ii. which is not a bank, financial institution or an insurancecompany;

iii. whose turnover (excluding other income) does not exceedrupees fifty crore in the immediately preceding accountingyear;

iv. which does not have borrowings (including public deposits)in excess of rupees ten crore at any time during theimmediately preceding accounting year; and

v. which is not a holding or subsidiary company of a companywhich is not a small and medium-sized company.


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The standards as notified vide aforesaid rules are applicableto all companies. Exemptions/relaxations in respect of smalland medium sized companies have been provided for eachof the standard. These exemption/relaxations arediscussed in the under mentioned paragraphs:1. Accounting Standard (AS) 3 : Cash Flow Statements

The standard deals with providing information about thehistorical changes in cash and cash equivalents of anenterprise by means of a cash flow statement whichclassifies cash flows during the period from operating,investing and financing activities. This standard is notmandatory for small and medium sized companies. It hashowever been provided in the standard that suchcompanies are encouraged to comply with the standard.


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2. Accounting Standard (AS) 15 : Employee Benefits

The standard deals with the accounting anddisclosure of all type of employee benefits. Thisstandard is applicable to small and medium sizedcompanies. However, certain exemptions/relaxationshave been provided with regard to the compliance ofcertain paragraphs of the standards. These are:a) Short term compensated absences

The standard provides that an enterprise shouldrecognise the cost of short term employeebenefits in the form of compensated absencesin the following two cases:


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(i) in the case of accumulated compensatedabsences, when the employee render service thatincreases their entitlement to future compensatedabsences. The expected cost of accumulatingcompensated absences are recognized.

(ii) in the case of non-accumulated compensatedabsences, when the absences occur say maternityleave. No liability is recognized unless absencesoccur.

Paragraph 11 to 16 deals with the provision required tobe made in this regard. A small and medium sizedcompany has been exempted from complying withthese requirements.


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b) Paragraph 50 to 116 deal with the recognition and measurementof such post employment benefits in the shape of defined benefitplans. These paragraphs are not applicable to a small andmedium sized companies instead it has been provided in thestandard that such a company should actuarially determine andprovide for the accrued liability in respect of defined benefitplans in the following manner:(i) The method used for actuarial valuation should be Projected

Unit Credit Method.(ii) The discount rate used should be determined by reference to

market yields at the balance sheet date on governmentbonds. These bonds should have the currency and termconsistent with the currency and estimated term of postemployment benefit obligations.


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(c) Paragraph 117 to 118 of the standard deal with theoffsetting of an asset relating to one plan against theliability relating to another plan. These paragraphs arealso not required to be complied by small and mediumsized companies.

(d) The disclosure requirements contained in paragraph 119to 123 are also not applicable in case of such companiesexcept that such companies are required to disclose theactuarial assumptions.

(e) Paragraph 129 to 131 deal with the recognition andmeasurement principles for estimating the present value ofliability for other long term benefits. The principles statedin (b) hereinabove will have to be followed by small andmedium sized companies.


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(f) Paragraph 46 and 139 of the Standard deal with thediscounting of amounts that fall due more than 12months after the balance sheet date. Paragraph 46deals with contributions to a defined contribution planand paragraph 139 deals with termination benefits.

(g) With regard to termination benefits the standardprovide that benefits falling due more than 12 monthsafter the balance sheet date should be discounted soas to compute the present value of the liability. Suchprovisions are also not applicable to small andmedium sized companies.


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3. Accounting Standard (AS) 17 : Segment Reporting

This standard requires the reporting of financialinformation about the different types of productsand services an enterprise produces and thedifferent geographical areas in which it operates.This standard is not applicable to Small andMedium Sized Companies. However, suchcompanies are encouraged to comply with thestandard.


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4. Accounting Standard (AS) 19 – Leases

This standard deals with the accounting for leasesdistinguishing between finance and operating leases. Thestandard also requires certain disclosures in respect of suchleases. The exemptions/relaxations have been providedwith regard to disclosure requirements to small and mediumsized companies. These are as under:(i) Paragraph 22 of the Standard deals with the disclosure

relating to finance leases. This paragraph requirescertain additional disclosures apart from thosecontained in AS 6 and AS 10. In case of small andmedium sized companies the following disclosures arenot required to made:


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(a) a reconciliation between the total of minimum leasepayments at the balance sheet date and their presentvalue. In addition, an enterprise should disclose thetotal of minimum lease payments at the balance sheetdate, and their present value, for each of the followingperiods:(i) not later than one year;(ii) Later than one year and not later than five years;(iii) Later than five years;

(b) the total of future minimum sublease paymentsexpected to be received under non-cancellablesubleases at the balance sheet date; and


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(c) A general description of the leassee’s significant leasingarrangements including, but not limited to, the following:(i) the basis on which contingent rent payments are

determined;(ii) The existence and terms of renewal or purchase options

and escalation clauses; and(iii) Restrictions imposed by lease arrangements, such as

those concerning dividends, additional debt, and furtherleasing.

(ii) Paragraph 25 deals with general disclosures by a lessee incase of operating leases. In case of small and mediumsized companies following are not required to be disclosed.


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a) the total of future minimum lease payments undernon-cancellable operating leases for each of thefollowing periods:(i) not later than one year;(ii) later than one year and not later than five years;(iii) later than five years;

b) the total of future minimum sublease paymentsexpected to be received under non-cancellablesubleases at the balance sheet date;


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c) a general description of the lessee’s significantleasing arrangements including, but not limitedto, the following:(i) the basis on which contingent rent payments

are determined;(ii) the existence and terms of renewal or

purchase options and escalation clauses;and

(iii) restrictions imposed by lease arrangements,such as those concerning dividends,additional debt, and further leasing.


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(ii) The lessor in case of a small and medium sized company is not required to disclose the following: (Paragraph 37 and 46).a) a reconciliation between the total gross investment in

the lease at the balance sheet date, and the presentvalue of minimum lease payments receivable at thebalance sheet date.

b) Total gross investment in the lease and the presentvalue of minimum lease payments receivable at thebalance sheet date, for each of the following periods:(i) not later than one year; (ii) later than one year and not later than five years;(iii) later than five years;


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(c) a general description of the significant leasingarrangement of the lessor.

(d) AS 6 dealing with Depreciation, AS 10 dealing withAccounting for Fixed Assets and the Companies Act1956 require certain disclosures in the profit andloss account and the balance sheet with regard tothe particulars of depreciation and fixed assets. Arelaxation is provided to lessors in respect ofdisclosures dealing with the operating leases inrespect of the following:


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(i) the future minimum lease payments undernon-cancellable operating leases in theaggregate and for each of the followingperiods:

(a) not later than one year; (b) later than one year and not later than five

years;(c) later than five years;

(ii) a general description of the lessor’ssignificant leasing arrangements.


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5. Accounting Standard (AS) 20 : Earning Per Share

This standard is also applicable to all companies.However, small and medium sized companiesmay not disclose diluted earnings per share (bothincluding and excluding extra ordinary items). Itmay be added that this standard deals with thedisclosure of earning per share. The standardalso deals with the method to be followed forcomputation of earning per share.


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6. Accounting Standard (AS) 24 : Discontinuing Operations

The standard deals with the reporting informationabout the discontinuing operations. One of theparagraphs (20)(h) requires the disclosure of net cashflows attributable to the operating, investing andfinancing activities of the discontinuing operationduring current financial reporting period. AS 3 dealingwith cash flow statements is not applicable to a smalland medium sized companies. The requirement asaforesaid would not be applicable to small andmedium sized companies.


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7. The following standards would not be applicable to asmall and medium sized companies:(i) Accounting Standard (AS) 21 : Consolidated

Financial Statements(ii) Accounting Standard (AS) 23 : Accounting for

Investments in Associates in consolidatedFinancial Statements

(iii) Accounting Standard (AS) 25 : Interim FinancialReporting

(iv) Accounting Standard (AS) 27 : FinancialReporting of Interest in Joint Ventures


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8. Accounting Standard (AS) 28 : Impairment of Assets

This standard prescribes the procedures that an enterpriseshould apply to ensure that assets are carried at no more thantheir recoverable amount. Recoverable amount has beendefined as higher of an assets’ net selling price and its value inuse. Value in use has been defined in the standard as thepresent value of estimated future cash flows expected to arisefrom the continuing use of an asset and from its disposal at theend of its useful life. The standard provides for determiningvalue in use in case of various entities. However, standardprovides that the small and medium sized companies need notuse present value techniques.


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Instead of present value technique a reasonableestimate of the ‘value in use’ can be made.Consequently, if an SMC chooses to measure the‘value in use’ by not using the present valuetechnique, the relevant provisions of AS 28, such asdiscount rate etc., would not be applicable to such anSMC.

(b) The standard also exempts small and medium sizedcompanies from making a disclosure with regard tothe discount etc. used for estimating present value ifa Small and Medium Sized Company chooses tomeasure the ‘value in use’ as above.


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9. Accounting Standard (AS) 29 : Provisions,Contingent Liabilities and Contingent Assets.This standard contains provisions so as to ensure thatappropriate recognition criteria and measurement basesare applied to provisions and contingent liabilities and thatsufficient information is disclosed in the notes to thefinancial statements to understand their nature, timing andamount. It also lays down appropriate accounting forcontingent assets. The standard is applicable to all thecompanies except for the disclosure requirementscontained in paragraph 66 to 67 of the standard which arenot applicable to small and medium sized companies. Therelevant exemptions are in respect of the followingdisclosures:


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(a) the carrying amount at the beginning and end of the period;(b) additional provisions made in the period, including increases to

existing provisions;(c) amounts used (i.e. incurred and charged against the provision)

during the period; and(d) unused amounts reversed during the period.(e) a brief description of the nature of the obligation and the expected

timing of any resulting outflows of economic benefits;(f) an indication of the uncertainties about those outflows. Where

necessary to provide adequate information, an enterprise shoulddisclose the major assumptions made concerning future events,

(g) the amount of any expected reimbursement, stating the amount ofany asset that has been recognised for that expectedreimbursement.


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