by Corporate Social Responsibility (CSR) is governed under Section 135 of the Companies Act, 2013, which mandates certain companies to spend a portion of their profits on social and environmental activities. Proper accounting for CSR activities is crucial for transparency, ensuring that funds are allocated effectively and used for the intended purposes. The accounting for CSR expenses involves both recording and reporting the expenditures, as well as adhering to the statutory requirements as laid out by the Companies Act, 2013.
CSR Policy Framework:
Every company falling under the CSR applicability criteria must formulate a CSR policy, which outlines the objectives and activities to be pursued. This policy must be approved by the Board of Directors and must include areas such as education, health, gender equality, environmental sustainability, etc. The CSR policy also defines the amount to be spent and how the company will track its CSR contributions.
CSR Spend Recognition:
Under Section 135(5) of the Companies Act, 2013, the company is required to spend a minimum of 2% of its average net profit over the last three financial years on CSR activities. If the company fails to meet this requirement, it must explain the reasons in the Director’s Report.
CSR Expenditure Classification:
The expenditure on CSR activities should be recognized as “CSR expense” in the profit and loss statement. The company should create separate accounts for CSR expenditure, ensuring that it is not confused with other operational expenses. These expenses should be classified under the appropriate heads as per Schedule VII of the Companies Act, 2013.
Accounting Entries:
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CSR Expense Debit
When CSR expenditure is incurred, the following accounting entry is recorded:
Debit: CSR Expense (P&L Account)
Credit: Cash/Bank (Liability)
- CSR Liability Recognition
If the CSR funds are not utilized immediately but committed to be used in the future, the following entry is passed:
Debit: CSR Expense (P&L Account)
Credit: CSR Payable (Liability Account)
Capital vs Revenue CSR Expenditure
The CSR expenditure may be classified into either capital or revenue expenditure, depending on the nature of the activity. For example:
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Revenue CSR Expenditure: This includes donations, contributions, and expenses related to social activities like health, education, and welfare.
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Capital CSR Expenditure: This includes expenses related to long-term assets such as setting up a school, hospital, or infrastructure for a community. Such costs are capitalized and depreciated over time.
CSR Reporting and Disclosures:
The company is required to disclose CSR expenditure in its financial statements, along with details on the projects undertaken. The report must mention:
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The total CSR expenditure for the year
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The areas where the CSR activities were carried out
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The amount spent directly on CSR activities and any indirect expenses
The CSR policy and related details must be included in the annual report, and the company must specify whether it has complied with the mandatory 2% expenditure or provide reasons for non-compliance.
Unspent CSR Funds:
If the company is unable to spend the required CSR amount in a given year, the unspent funds must be transferred to a special account for CSR expenditure within six months of the end of the financial year. These funds should be spent within the next three years. If the company fails to spend the CSR amount within this period, it must explain the reasons in the Director’s Report.
Accounting for Unspent CSR Funds:
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Unspent CSR Funds Transfer:
Debit: CSR Expense (P&L Account)
Credit: Unspent CSR Fund (Liability Account)
CSR Audit:
Companies are required to ensure that CSR expenditures are properly audited, especially for companies with a CSR obligation of ₹10 crores or more. This ensures that the CSR activities are carried out as per the policy and guidelines established under the Companies Act, 2013. The audit helps verify the accuracy of the funds spent and the compliance with the CSR policy.
