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 Small
and Medium Sized Enterprises has been notified by
the Companies (Accounting Standards) Rules 2006
under the Companies Act 1956. Such enterprises
for the purposes of Companies Act 1956 have been
classified as “Small and Medium Sized Companies”.
In accordance with the definition contained in the
said rule, a Small and Medium Sized Company
(SMC) means, a companyS.C. Vasudeva & Co., Chartered
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i. whose equity or debt securities are not listed or are not in
the process of listing on any stock exchange, whether in
India or outside India;
ii. which is not a bank, financial institution or an insurance
company;
iii. whose turnover (excluding other income) does not exceed
rupees fifty crore in the immediately preceding accounting
year;
iv. which does not have borrowings (including public deposits)
in excess of rupees ten crore at any time during the
immediately preceding accounting year; and
v. which is not a holding or subsidiary company of a company
which is not a small and medium-sized company.
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The standards as notified vide aforesaid rules are applicable
to all companies. Exemptions/relaxations in respect of small
and medium sized companies have been provided for each
of the standard.
These exemption/relaxations are
discussed in the under mentioned paragraphs:
1. Accounting Standard (AS) 3 : Cash Flow Statements
The standard deals with providing information about the
historical changes in cash and cash equivalents of an
enterprise by means of a cash flow statement which
classifies cash flows during the period from operating,
investing and financing activities. This standard is not
mandatory for small and medium sized companies. It has
however been provided in the standard that such
companies are encouraged to comply with the standard.
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2. Accounting Standard (AS) 15 : Employee Benefits
The standard deals with the accounting and
disclosure of all type of employee benefits. This
standard is applicable to small and medium sized
companies. However, certain exemptions/relaxations
have been provided with regard to the compliance of
certain paragraphs of the standards. These are:
a) Short term compensated absences
The standard provides that an enterprise should
recognise the cost of short term employee
benefits in the form of compensated absences
in the following two cases:
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(i) in the case of accumulated compensated
absences, when the employee render service that
increases their entitlement to future compensated
absences. The expected cost of accumulating
compensated absences are recognized.
(ii) in the case of non-accumulated compensated
absences, when the absences occur say maternity
leave. No liability is recognized unless absences
occur.
Paragraph 11 to 16 deals with the provision required to
be made in this regard. A small and medium sized
company has been exempted from
complying
with
these requirements.
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b) Paragraph 50 to 116 deal with the recognition and measurement
of such post employment benefits in the shape of defined benefit
plans. These paragraphs are not applicable to a small and
medium sized companies instead it has been provided in the
standard that such a company should actuarially determine and
provide for the accrued liability in respect of defined benefit
plans 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 government
bonds. These bonds should have the currency and term
consistent with the currency and estimated term of post
employment benefit obligations.
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(c) Paragraph 117 to 118 of the standard deal with the
offsetting of an asset relating to one plan against the
liability relating to another plan. These paragraphs are
also not required to be complied by small and medium
sized companies.
(d) The disclosure requirements contained in paragraph 119
to 123 are also not applicable in case of such companies
except that such companies are required to disclose the
actuarial assumptions.
(e) Paragraph 129 to 131 deal with the recognition and
measurement principles for estimating the present value of
liability for other long term benefits. The principles stated
in (b) hereinabove will have to be followed by small and
medium sized companies.
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(f) Paragraph 46 and 139 of the Standard deal with the
discounting of amounts that fall due more than 12
months after the balance sheet date. Paragraph 46
deals with contributions to a defined contribution plan
and paragraph 139 deals with termination benefits.
(g) With regard to termination benefits the standard
provide that benefits falling due more than 12 months
after the balance sheet date should be discounted so
as to compute the present value of the liability. Such
provisions are also not applicable to small and
medium sized companies.
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3. Accounting Standard (AS) 17 : Segment Reporting
This standard requires the reporting of financial
information about the different types of products
and services an enterprise produces and the
different geographical areas in which it operates.
This standard is not applicable to Small and
Medium Sized Companies. However, such
companies are encouraged to comply with the
standard.
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4. Accounting Standard (AS) 19 – Leases
This standard deals with the accounting for leases
distinguishing between finance and operating leases. The
standard also requires certain disclosures in respect of such
leases. The exemptions/relaxations have been provided
with regard to disclosure requirements to small and medium
sized companies. These are as under:
(i) Paragraph 22 of the Standard deals with the disclosure
relating to finance leases. This paragraph requires
certain additional disclosures apart from those
contained in AS 6 and AS 10. In case of small and
medium sized companies the following disclosures are
not required to made:
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(a) a reconciliation between the total of minimum lease
payments at the balance sheet date and their present
value. In addition, an enterprise should disclose the
total of minimum lease payments at the balance sheet
date, and their present value, 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;
(b) the total of future minimum sublease payments
expected to be received under non-cancellable
subleases at the balance sheet date; and
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(c) A general description of the leassee’s significant leasing
arrangements 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 further
leasing.
(ii) Paragraph 25 deals with general disclosures by a lessee in
case of operating leases. In case of small and medium
sized companies following are not required to be disclosed.
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a) the total of future minimum lease payments under
non-cancellable operating leases 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;
b) the total of future minimum sublease payments
expected to be received under non-cancellable
subleases at the balance sheet date;
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c) a general description of the lessee’s significant
leasing arrangements 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 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 present
value of minimum lease payments receivable at the
balance sheet date.
b) Total gross investment in the lease and the present
value of minimum lease payments receivable at the
balance 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 leasing
arrangement of the lessor.
(d) AS 6 dealing with Depreciation, AS 10 dealing with
Accounting for Fixed Assets and the Companies Act
1956 require certain disclosures in the profit and
loss account and the balance sheet with regard to
the particulars of depreciation and fixed assets. A
relaxation is provided to lessors in respect of
disclosures dealing with the operating leases in
respect of the following:
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(i) the future minimum lease payments under
non-cancellable operating leases in the
aggregate and for each of the following
periods:
(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’s
significant 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 companies
may not disclose diluted earnings per share (both
including and excluding extra ordinary items). It
may be added that this standard deals with the
disclosure of earning per share. The standard
also deals with the method to be followed for
computation of earning per share.
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6. Accounting Standard (AS) 24 : Discontinuing
Operations
The standard deals with the reporting information
about the discontinuing operations. One of the
paragraphs (20)(h) requires the disclosure of net cash
flows attributable to the operating, investing and
financing activities of the discontinuing operation
during current financial reporting period. AS 3 dealing
with cash flow statements is not applicable to a small
and medium sized companies. The requirement as
aforesaid would not be applicable to small and
medium sized companies.
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7. The following standards would not be applicable to a
small and medium sized companies:
(i) Accounting Standard (AS) 21 : Consolidated
Financial Statements
(ii) Accounting Standard (AS) 23 : Accounting for
Investments in Associates in consolidated
Financial Statements
(iii) Accounting Standard (AS) 25 : Interim Financial
Reporting
(iv) Accounting Standard (AS) 27 : Financial
Reporting of Interest in Joint Ventures
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8. Accounting Standard (AS) 28 : Impairment
of Assets
This standard prescribes the procedures that an enterprise
should apply to ensure that assets are carried at no more than
their recoverable amount. Recoverable amount has been
defined as higher of an assets’ net selling price and its value in
use. Value in use has been defined in the standard as the
present value of estimated future cash flows expected to arise
from the continuing use of an asset and from its disposal at the
end of its useful life. The standard provides for determining
value in use in case of various entities. However, standard
provides that the small and medium sized companies need not
use present value techniques.
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Instead of present value technique a reasonable
estimate of the ‘value in use’ can be made.
Consequently, if an SMC chooses to measure the
‘value in use’ by not using the present value
technique, the relevant provisions of AS 28, such as
discount rate etc., would not be applicable to such an
SMC.
(b) The standard also exempts small and medium sized
companies from making a disclosure with regard to
the discount etc. used for estimating present value if
a Small and Medium Sized Company chooses to
measure 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 that
appropriate recognition criteria and measurement bases
are applied to provisions and contingent liabilities and that
sufficient information is disclosed in the notes to the
financial statements to understand their nature, timing and
amount. It also lays down appropriate accounting for
contingent assets. The standard is applicable to all the
companies except for the disclosure requirements
contained in paragraph 66 to 67 of the standard which are
not applicable to small and medium sized companies. The
relevant exemptions are in respect of the following
disclosures:
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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 should
disclose the major assumptions made concerning future events,
(g) the amount of any expected reimbursement, stating the amount of
any asset that has been recognised for that expected
reimbursement.
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