CSR Expenditure Accounting Treatment and Asset Handling

Facts

XYZ Limited (hereinafter referred to as “the company”), a listed manufacturing company, has an annual CSR obligation of ₹5 crore for FY 2024–25. The company decides to utilize ₹2 crore of this amount for constructing a community health center in a rural area. The health center is intended to provide free medical facilities to villagers and will be managed by a Section 8 company i.e. ABC Foundation, that holds a valid CSR registration number.

Separately, during FY 2019–20, the company had constructed a vocational training center for underprivileged youth, which was shown as a fixed asset in its books. With the introduction of the Companies (CSR Policy) Amendment Rules, 2021, the company is now required to transfer this asset to an eligible entity. Accordingly, the asset is transferred in FY 2021–22 to a Registered Public Trust, and derecognized from its balance sheet.

Further, as part of its CSR activity in FY 2024–25, the company also donates goods manufactured by it (medical kits worth ₹50 lakh) to beneficiaries. These goods were valued in accordance with Ind AS 2, Inventories and GST applicable on such kits was also borne by the company as part of CSR cost.

Relevant Provisions

Technical Guide on accounting for expenditure on CSR activities issued by ICAI

A company can spend its CSR funds to create or acquire a capital asset, but the asset must be owned by a Section 8 company, a registered public trust, a registered society with a CSR registration number, the project’s beneficiaries such as self-help groups or collectives, or a public authority. Such assets cannot be recorded in the company’s books. Instead, the spending is treated as CSR expense in the Statement of Profit and Loss.

If a company had already created a CSR-related capital asset before the 2021 amendment, it must transfer the asset to an eligible entity within 180 days (extendable by 90 days with board approval). On transfer, the company must remove the asset from its balance sheet.

Since CSR activities cannot generate business profits for the company, no future economic benefits from these assets can be recognised.

When CSR activities involve supplying goods or services, the expense is recorded when control of the goods passes or services are rendered. Goods must be valued as per Ind AS 2, Inventories or AS 2, Valuation of Inventories, while services are recorded at cost. Taxes like GST on such goods or services also count as CSR expenditure.

If the company receives a grant for CSR, the net amount after deducting the grant is recognised as CSR expenditure.

Analysis

Based on the guidance provided in the Technical Guide on Accounting for Expenditure on Corporate Social Responsibility Activities, the expenditure of ₹2 crore incurred by the company in FY 2024–25 for constructing a community health center qualifies as CSR expenditure since the asset is to be managed by ABC Foundation, a Section 8 company holding valid CSR registration. In accordance with Rule 7(4) of the Companies (CSR Policy) Amendment Rules, 2021, such a capital asset cannot be recognised in the books of the company because future economic benefits do not accrue to it, and therefore the amount will be charged to the Statement of Profit and Loss as CSR expense.

With regard to the vocational training center constructed in FY 2019–20 and capitalised in the company’s books, the 2021 Amendment Rules mandate transfer of such assets to eligible entities within the prescribed period. The company complied by transferring the center to a Registered Public Trust in FY 2021–22, and accordingly derecognised the asset from its balance sheet. This treatment is consistent with the requirement that CSR assets cannot remain with the company and ensures compliance with the revised framework.

Further, in FY 2024–25, the company donated medical kits worth ₹50 lakh manufactured by it as part of its CSR activities. As per Ind AS 2, these goods must be valued at cost or net realisable value, whichever is lower, and the expense recognised when control over the kits is transferred to the beneficiaries. Since GST borne by the company also forms part of CSR cost, both the value of the kits and the related GST are required to be charged to the Statement of Profit and Loss as CSR expense, with a corresponding reduction in inventory for the value of goods donated.

Accordingly, the company’s accounting treatment of CSR expenditure is aligned with the provisions of the Companies (CSR Policy) Rules and relevant Ind AS guidance, with amounts spent being expensed through the profit and loss account rather than recognised as assets, since no future economic benefits accrue to the company.

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