Revised Criteria for Small and Medium Sized Companies (SMCs) under Companies (Accounting Standard) Rules
- Blog|Account & Audit|Company Law|
- 4 Min Read
- By Taxmann
- |
- Last Updated on 5 July, 2021
Topics covered in this article are as follows:
- Revised definition of Small and Medium-Sized Companies (SMCs):
1.3 Borrowing Criteria for an SMC
1.4 Holding/ Subsidiary relation criterion
1.5 Implications of change in status of SMC
The Ministry of Corporate Affairs (MCA) has notified the Companies (Accounting Standard) Rules, 2021 in consultation with the National Financial Reporting Authority (NFRA), which shall be applicable for non-Ind AS companies i.e. those companies who do not have to apply Indian Accounting Standards as notified under Companies (Indian Accounting Standard) Rules, 2015.
The Accounting Standards Rules, 2021 shall come into effect in respect of accounting periods commencing on or after the 1st day of April 2021.
These Rules have been notified by the ministry under the Companies Act, 2013 which inserts some editorial changes in the standards. Additionally, the definition of Small and Medium-Sized Companies has been revised under which the turnover limit has been increased from Rs. 50 crores to not exceeding Rs. 250 crores and with enhanced borrowings limit from Rs. 10 crores to Rs. 50 crores.
1. Revised definition of Small and Medium-Sized Companies (SMCs):
1.1 An SMC is a Company –
- 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;
- which is not a bank, financial institution or an insurance company;
- whose turnover (excluding other income) does not exceed Rs. 250 crores in the immediately preceding accounting year;
- which does not have borrowings (including public deposits) in excess of Rs. 50 crores at any time during the immediately preceding accounting year; and
- which is not a holding or subsidiary company of a company that is not an SMC.
For the purposes of this clause (i.e. only the holding or subsidiary relation criteria), a company shall qualify as an SMC, if the conditions mentioned therein are satisfied as at the end of the relevant accounting period.
1.2 Turnover Criteria for SMC –
- The definition clarifies that turnover for the purpose of the Rules shall exclude other income. In this context, it is important to understand what is meant by the term “other income” and which items should be classified under this head vis-à-vis under the head “Revenue” or, more particularly, “other operating revenue” within revenue.
For example, sale of Property, Plant and Equipment which not an operating activity of a company, and hence, profit on sale of Property, Plant and Equipment should be classified as other income and not other operating revenue. On the other hand, sale of manufacturing scrap arising from operations for a manufacturing company should be treated as other operating revenue since the same arises on account of the company’s main operating activity.
- The above turnover criteria need to be assessed for the immediately preceding financial year i.e. if a company is evaluating whether it is an SMC or not for F.Y. 2021-22 then the turnover of F.Y. 2020-21 shall be considered.
1.3 Borrowing Criteria for an SMC –
- The definition of an SMC excludes companies that do not have borrowings (including public deposits) in excess of Rs. 50 crores at any time during the immediately preceding accounting year. Though the term borrowings has not been defined under these Rules, it shall include all loans, debentures, bonds and other debt instruments issued by the company and public deposits.
- Unlike turnover limit, the threshold limit of borrowing is based on funds borrowed at any point of time during the immediately preceding financial year. Therefore, if a company had borrowed funds in excess of Rs. 50 crores, but had repaid part of the borrowing prior to the year-end, it would be considered as non-SMC, despite of the yearend balance being below the threshold of Rs. 50 crores.
1.4 Holding/Subsidiary Relation Criterion –
- If a company is a holding company or subsidiary company of another company that is a non-SMC then such company shall be qualified as Non-SMC. Therefore, if a company has a non-SMC company in its group (subsidiary or holding) it shall be a non-SMC.
- Further, the above criterion is based only on group company relation restricted to holding and subsidiary relationship. Accordingly, this criterion does not include joint venture, associates unlike Ind AS Roadmap under Companies (Indian Accounting Standards) Rules, 2015.
1.5 Implications of Change in Status of SMC –
The Rules deals with scenarios when the SMC/non-SMC status of a company changes
Scenario |
Non-SMC to SMC |
SMC to non-SMC |
Requirement | Clause 5 of the Rules states that when a non-SMC becomes an SMC, it shall not avail any SMC exemption/relaxation in the accounting standards until the company remains SMC for two consecutive accounting periods. | Clause 1.2 of the Annexure A. General Instructions to the Rules states that when a company that was previously meeting the SMC definition not longer meets the SMC definition, all the relevant accounting standards and requirements shall become applicable from the current period.
The figures for the corresponding period of the previous year need not be revised/restated merely due to the reason of it having ceased to become an SMC. The company shall disclose the fact that it was an SMC in the previous period and it had availed an SMC exemptions/ relaxations shall be disclosed in the notes to the financial statements. |
Example | A Ltd., a non-SMC on 31 March 2021, meets all the SMC criteria as of 31 March 2022.
For FY 2021-22, A Ltd. can not apply any of the SMC exemption/relaxation in the accounting standards. If A Ltd. continues to fulfil all the criteria in the SMC definition as of 31 March 2023, it shall be eligible to apply the SMC exemption/relaxation in the accounting standards for F.Y. 2022-23. However, alternatively, if A Ltd. does not meet any of the criteria in the SMC definition, it shall continue to apply full accounting standards without any exemptions/ relaxations in FY 2022-23 despite being SMC of 31 March 2022. |
B Ltd., an SMC on 31 March 2021, fails to meet the SMC criteria as of 31 March 2022.
For FY 2021-22, A Ltd. can not apply any of the SMC exemption/relaxation in the accounting standards. A has to apply full accounting standards. In the financial statements for FY 2021-22, the figures for the corresponding period of the previous year (FY 2020-21) need not be revised/ restated merely due to the reason of it having ceased to become SMC. A Ltd. shall disclose the fact that it was an SMC in the previous period and it had availed SMC exemptions/ relaxations in the notes to the financial statements. |
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If a company is a subsidiary of a foreign company then whether can it avail exemption of SMC
Hey Manish, No please refer Rule 2(e) of the Companies (Accounting Standards) Rules, 2021