Facts of the case– A Central Public Sector Enterprise (CPSE), established under the Warehousing Corporations Act, 1962, provided warehousing and logistics solutions in a socially responsible and environmentally friendly manner. The CPSE incurred a CSR expenditure of Rs. 802.52 lakh during FY 2021-22, which was appropriated out of profits through the profit and loss appropriation account, as it was not part of the normal business activity of the Corporation.
Queries Posed before the EAC– Whether CSR expenditures were correctly appropriated out of profits through the Profit and Loss Appropriation Account by the Corporation, or should these expenditures be charged to the Profit and Loss Account?
Company’s Contention:
CSR expenditure was not considered an allowable expense for profit computation for determining CSR expenses as per section 198 of the Companies Act, 2013, and DPE (Department of Public Enterprises) CSR guidelines.
According to ICAI FAQs on CSR provisions u/s 135 of the Companies Act, 2013: “In general, the CSR spend amount needs to be appropriated unless it is incurred by the company as part of its normal business activity which also qualifies for CSR activity; in that case, it will be charged to P&L in the normal course.”
Other public enterprises covered under special Acts of Parliament and not under the Companies Act, 2013, were also showing the same in the Profit and Loss Appropriation Account.
Top 3 Key Analysis by EAC:
CSR Guidelines Compliance: As per DPE guidelines, the CPSE must undertake CSR activities and spend the prescribed amount annually, in line with the Companies Act, 2013.
Accounting Standards: According to AS 5, CSR expenditure should be recognized as an expense in the Profit and Loss Statement,as it does not create future economic benefits for the corporation or it does not result in any ‘asset’ to the Corporation. Therefore, the CSR expenditure incurred during a period should berecognized as an expense in the Statement of Profit and Loss of the Corporation.
ICAI Guidance: Since the Corporation is required to follow the requirements of the Companies Act regarding CSR activities, the accounting prescribed by the FAQ and Technical Guide also applies to the Corporation.
Conclusion– The expenditure incurred by the Corporation towards CSR activities should be recognized as an expense in the Statement of Profit and Loss of the Corporation as and when such expenditure is incurred, rather than as an appropriation of profits in the Profit and Loss Appropriation Account.
SW Point of View:
The Corporation should recognize CSR expenditures as an expense in the Statement of Profit and Loss when incurred, instead ofappropriating them from profits. This ensures accurate reflection of financial performance and compliance with accounting standards.
