Page 4 - 31. COMPILER QB - CSR

MTP QUESTIONS

Q3 (April 18)

Discuss whether any unspent amount of CSR expenditure is to be provided for?
SOLUTION

Section 135 (5) of Companies Act, 2013, requires that the board of every eligible company, “shall ensure
that the company spends, in every financial year, at least 2% of the average net profit of the company
made during the three immediately preceding financial years, in pursuance of its Corporate Social
Responsibility Policy”. A proviso to this section states that “if the company fails to spend such amount, the
Board shall, in its report specify the reason for not spending the amount”.

Further, Rule 8(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, prescribes that
the board report of a company under these Rules shall include an Annual Report of CSR, in the prescribed

format.
The above provisions of the Act/Rules clearly lay down that the expenditure on CSR activities is to be

disclosed only in the Board’s report in accordance with Rules made thereunder.
In view of this, no provision for the amount which is not spent, (i.e., any shortfall in the amount that was

expected to be spent as per the provisions of the Act on CSR activities and the amount actually spent at the
end of a reporting period) may be made in the financial statements. The proviso to section 135 (5) of the

Act, makes it clear that if the specified amount is not spent by the company during the year, the Directors’
Report should disclose the reason for not spending the amount.

However, if a company has already undertaken certain CSR activity for which a liability has been incurred by
entering into a contractual obligation, then in accordance with the generally accepted principles of accounting,

a provision for the amount representing the extent to which the CSR activity was completed during the year,

needs to be recognised in the financial statements.

Q4 (August 18)

State whether any unspent amount of CSR expenditure (any shortfall in the amount that was expected to be
spent as per the provisions of the Companies Act on CSR activities) at the reporting date shall be provided
for? Also state in case the excess amount has been spent (ie more than what is required as per the provisions

of the Companies Act on CSR activities), can it be carry forward to set-off against future CSR expenditure
SOLUTION

(i) Treatment of any unspent amount of CSR expenditure
Since the expenditure on CSR activities is to be disclosed only in the Board’s Report, no provision for the
amount which is not spent, (i.e., any shortfall in the amount that was expected to be spent as per the
provisions of the Act on CSR activities and the amount actually spent at the end of a reporting period) may
be made in the financial statements.

The Act requires that if the specified amount is not spent by the company during the year, the Directors’
Report should disclose the reasons for not spending the amount.

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