Announcement by The Institute of Chartered Accountants of India

Criteria for classification of Non-company entities for applicability of Accounting Standards. The Council, at its 400th meeting, held in March, 2021, considered the matter relating to applicability of Accounting Standards issued by The Institute of Chartered Accountants Of India (ICAI), to Non-company entities (Enterprises). The scheme for applicability of Accounting Standards to Non-company entities shall come into effect in respect of accounting periods commencing on or after April 1, 2020.

1. For the purpose of applicability of Accounting Standards, Non-company entities are classified into four categories, viz., Level I, Level II, Level III and Level IV.

Level I entities are large size entities, Level II entities are medium size entities, Level III entities are small size entities and Level IV entities are micro entities. Level IV, Level III and Level II entities are referred to as Micro, Small and Medium Enterprises (MSMEs). The criteria for classification of Non-company entities into different levels are given in Annexure 1.

The terms ‘Small and Medium Enterprise’ and ‘SME’ used in Accounting Standards shall be read as entities and ‘MSME’ respectively.

2. Level I entities are required to comply in full with all the Accounting Standards.

3. Certain exemptions/relaxations have been provided to Level II, Level III and Level IV Non-company entities. Applicability of Accounting Standards and exemptions/relaxations to such entities are given in Annexure 2.

4. This Announcement supersedes the earlier Announcement of the ICAI on ‘Harmonisation of various differences between the Accounting Standards issued by the ICAI and the Accounting Standards notified by the Central Government’ issued in February 2008, to the extent it prescribes the criteria for classification of Non-company entities (Non-corporate entities) and applicability of Accounting Standards to non-company entities.

5. This Announcement is not relevant for Non-company entities who may be required to follow Ind AS as per relevant regulatory requirements applicable to such entities.

6. The changes arising from this Announcement will be incorporated in the Accounting Standards while publishing the updated Compendium of Accounting Standards.

ANNEXURE 1

Criteria for classification of Non-company Entities as decided by ICAI

Level I Entities

 (i) Entities whose securities are listed or are in the process of listing on any stock exchange, whether in India or outside India.

(ii) Banks (including co-operative banks), financial institutions or entities carrying on insurance business.

(iii) All entities engaged in commercial, industrial or business activities, whose turnover (excluding other income) exceeds rupees two-fifty crore in the immediately preceding accounting year.

(iv) All entities engaged in commercial, industrial or business activities having borrowings (including public deposits) in excess of rupees fifty crore at any time during the immediately preceding accounting year.

(v) Holding and subsidiary entities of any one of the above.

Level II Entities

 (i) All entities engaged in commercial, industrial or business activities, whose turnover (excluding other income) exceeds rupees fifty crore but does not exceed rupees two-fifty crore in the immediately preceding accounting year.

(ii) All entities engaged in commercial, industrial or business activities having borrowings (including public deposits) in excess of rupees ten crore but not in excess of rupees fifty crore at any time during the immediately preceding accounting year.

(iii) Holding and subsidiary entities of any one of the above.

Level III Entities

Non-company entities which are not covered under Level I and Level II but fall in any one or more of the following categories are classified as Level III entities:

(i) All entities engaged in commercial, industrial or business activities, whose turnover (excluding other income) exceeds rupees ten crore but does not exceed rupees fifty crore in the immediately preceding accounting year.

(ii) All entities engaged in commercial, industrial or business activities having borrowings (including public deposits) in excess of rupees two crore but does not exceed rupees ten crore at any time during the immediately preceding accounting year.

(iii) Holding and subsidiary entities of any one of the above.

Level IV Entities

Non-company entities which are not covered under Level I, Level II and Level III are considered as Level IV entities.

Additional requirements

(1) An MSME which avails the exemptions or relaxations given to it shall disclose (by way of a note to its financial statements) the fact that it is an MSME, the Level of MSME and that it has complied with the Accounting Standards insofar as they are applicable to entities falling in Level II or Level III or Level IV, as the case may be.

(2) Where an entity, being covered in Level II or Level III or Level IV, had qualified for any exemption or relaxation previously but no longer qualifies for the relevant exemption or relaxation in the current accounting period, the relevant standards or requirements become applicable from the current period and the figures for the corresponding period of the previous accounting period need not be revised merely by reason of its having ceased to be covered in Level II or Level III or Level IV, as the case may be. The fact that the entity was covered in Level II or Level III or Level IV, as the case may be, in the previous period and it had availed of the exemptions or relaxations available to that Level of entities shall be disclosed in the notes to the financial statements. The fact that previous period figures have not been revised shall also be disclosed in the notes to the financial statements.

(3) Where an entity has been covered in Level I and subsequently, ceases to be so covered and gets covered in Level II or Level III or Level IV, the entity will not qualify for exemption/relaxation available to that Level, until the entity ceases to be covered in Level I for two consecutive years. Similar is the case in respect of an entity, which has been covered in Level II or Level III and subsequently, gets covered under Level III or Level IV.

(4) If an entity covered in Level II or Level III or Level IV opts not to avail of the exemptions or relaxations available to that Level of entities in respect of any but not all of the Accounting Standards, it shall disclose the Standard(s) in respect of which it has availed the exemption or relaxation.

(5) If an entity covered in Level II or Level III or Level IV opts not to avail any one or more of the exemptions or relaxations available to that Level of entities, it shall comply with the relevant requirements of the Accounting Standard.

(6) An entity covered in Level II or Level III or Level IV may opt for availing certain exemptions or relaxations from compliance with the requirements prescribed in an Accounting Standard:

Provided that such a partial exemption or relaxation and disclosure shall not be permitted to mislead any person or public.

(7) In respect of Accounting Standard (AS) 15, Employee Benefits, exemptions/ relaxations are available to Level II and Level III entities, under two sub-classifications, viz., (i) entities whose average number of persons employed during the year is 50 or more, and (ii) entities whose average number of persons employed during the year is less than 50. The requirements stated in paragraphs (1) to (6) above, mutatis mutandis, apply to these sub-classifications.

ANNEXURE 2

 Accounting Standards applicable to Non-company entities

AS	Accounting Standards	Level II Entities	Level III Entities	Level IV Entities
AS 1	Disclosure of Accounting Policies	Applicable	Applicable	Applicable
AS 2	Valuation of Inventories	Applicable	Applicable	Applicable
AS 3	Cash Flow Statements	Not Applicable	Not Applicable	Not Applicable
AS 4	Contingencies and Events Occurring After the Balance Sheet Date	Applicable	Applicable	Applicable
AS 5	Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies	Applicable	Applicable	Applicable
AS 7	Construction Contracts	Applicable	Applicable	Applicable
AS 9	Revenue Recognition	Applicable	Applicable	Applicable
AS 10	Property, Plant and Equipment	Applicable	Applicable with disclosures exemption	Applicable with disclosures exemption
AS 11	The Effects of Changes in Foreign Exchange Rates	Applicable	Applicable with disclosures exemption	Applicable with disclosures exemption
AS 12	Accounting for Government Grants	Applicable	Applicable	Applicable
AS 13	Accounting for Investments	Applicable	Applicable	Applicable with disclosures exemption
AS 14	Accounting for Amalgamations	Applicable	Applicable	Not Applicable (Refer note 2(C))
AS 15	Employee Benefits	Applicable with exemptions	Applicable with exemptions	Applicable with exemptions
AS 16	Borrowing Costs	Applicable	Applicable	Applicable
AS 17	Segment Reporting	Not Applicable	Not Applicable	Not Applicable
AS 18	Related Party Disclosures	Applicable	Not Applicable	Not Applicable
AS 19	Leases	Applicable with disclosures exemption	Applicable with disclosures exemption	Applicable with disclosures exemption
AS 20	Earnings Per Share	Not Applicable	Not Applicable	Not Applicable
AS 21	Consolidated Financial Statements	Not Applicable (Refer note 2(D))	Not Applicable (Refer note 2(D))	Not Applicable (Refer note 2(D))
AS 22	Accounting for Taxes on Income	Applicable	Applicable	Applicable only for current tax related provisions (Refer note 2(B)(vi))
AS 23	Accounting for Investments in Associates in Consolidated Financial Statements	Not Applicable (Refer note 2(D))	Not Applicable (Refer note 2(D))	Not Applicable (Refer note 2(D))
AS 24	Discontinuing Operations	Applicable	Not Applicable	Not Applicable
AS 25	Interim Financial Reporting	Not Applicable (Refer note 2(D))	Not Applicable (Refer note 2(D))	Not  Applicable (Refer note 2(D))
AS 26	Intangible Assets	Applicable	Applicable	Applicable with disclosures exemption
AS 27	Financial Reporting of Interests in Joint Ventures	Not Applicable (Refer notes 2(C) and 2(D))	Not Applicable (Refer notes 2(C) and 2(D))	Not Applicable (Refer notes 2(C) and2(D))
AS 28	Impairment of Assets	Applicable with disclosures exemption	Applicable with disclosures exemption	Not Applicable
AS 29	Provisions, Contingent Liabilities and Contingent Assets	Applicable with disclosures exemption	Applicable with disclosures exemption	Applicable with disclosures exemption

(B) Accounting Standards in respect of which relaxations/exemptions from certain requirements have been given to Level II, Level III and Level IV Non-company entities:

(i) Accounting Standard (AS) 10, Property, Plant and Equipments

Paragraph 87 relating to encouraged disclosures is not applicable to Level III and Level IV Non-company entities which is stated as follows:

 (ii) AS 11, The Effects of Changes in Foreign Exchange Rates (revised 2018)

Paragraph 44 relating to encouraged disclosures is not applicable to Level III and Level IV Non-company entities which states that Disclosure is also encouraged of an enterprise’s foreign currency risk management policy

(iii) AS 13, Accounting for Investments

Paragraph 35(f) relating to disclosures is not applicable to Level IV Non-company entities which states that other disclosures as specifically required by the relevant statute governing the enterprise.

(iv) AS 15, Employee Benefits (revised 2005)

(1) Level II and Level III Non-company entities whose average number of persons employed during the year is 50 or more are exempted from the applicability of the following paragraphs:

(a) paragraphs 11 to 16 of the standard to the extent they deal with recognition and measurement of short-term accumulating compensated absences which are non-vesting (i.e., short-term accumulating compensated absences in respect of which employees are not entitled to cash payment for unused entitlement on leaving); Short-term Compensated Absences

 (d) Recognition and measurement principles laid down in paragraphs 129 to 131 of the Standard in respect of accounting for other long-term employee benefits. However, such entities should actuarially determine and provide for the accrued liability in respect of other long-term employee benefits by using the Projected Unit Credit Method and the discount rate used should be determined by reference to market yields at the balance sheet date on government bonds as per paragraph 78 of the Standard.

(2) Level II and Level III Non-company entities whose average number of persons employed during the year is less than 50 and Level IV Non-company entities irrespective of number of employees are exempted from the applicability of the following paragraphs:

(a) paragraphs 11 to 16 of the standard to the extent they deal with recognition and measurement of short-term accumulating compensated absences which are non-vesting (i.e., short-term accumulating compensated absences in respect of which employees are not entitled to cash payment for unused entitlement on leaving);

(b) Paragraphs 46 and 139 of the Standard which deal with discounting of amounts that fall due more than 12 months after the balance sheet date;

(c) Recognition and measurement principles laid down in paragraphs 50 to 116 and presentation and disclosure requirements laid down in paragraphs 117 to 123 of the Standard in respect of accounting for defined benefit plans. However, such entities may calculate and account for the accrued liability under the defined benefit plans by reference to some other rational method, e.g., a method based on the assumption that such benefits are payable to all employees at the end of the accounting year; and (d) recognition and measurement principles laid down in paragraphs 129 to 131 of the Standard in respect of accounting for other long-term employee benefits. Such entities may calculate and account for the accrued liability under the other long-term employee benefits by reference to some other rational method, e.g., a method based on the assumption that such benefits are payable to all employees at the end of the accounting year.

(v) AS 19, Leases

(a) Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a) and (f); and 46 (b) and (d) relating to disclosures are not applicable to Level II Non-company entities.

(b) Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a), (f) and (g); and 46 (b), (d) and (e) relating to disclosures are not applicable to Level III Non-company entities.

(c) Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a), (f) and (g); 38; and 46 (b), (d) and (e) relating to disclosures are not applicable to Level IV Non-company entities.

Paragraph 22. The lessee should, in addition to the requirements of AS 10, Accounting for Fixed Assets, AS 6, Depreciation Accounting, and the governing statute, make the following disclosures for finance leases:

(c) A reconciliation between the total of minimum lease payments at the balance sheet date and their present value. In addition, an enterprise should disclose the total of minimum lease payments at the balance sheet date, and their present value, for each of the following periods:

(i) Not later than one year;

(ii) later than one year and not later than five years;

(iii) later than five years;

(e) The total of future minimum sublease payments expected to be received under non-cancellable subleases at the balance sheet date; and

(f) A general description of the lessee’s significant leasing arrangements including, but not limited to, the following:

(i) The basis on which contingent rent payments are determined;

(ii) The existence and terms of renewal or purchase options and

Escalation clauses; and

(iii) Restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and further leasing.

Provided that a Small and Medium Sized Company, as defined in the

Notification, may not comply with sub-paragraphs (c), (e) and (f).

Paragraph 25. The lessee should make the following disclosures for operating leases:

(a) The total of future minimum lease payments under no cancellable operating leases for each of the following periods:

(i) Not later than one year;

(ii) later than one year and not later than five years;

(iii) later than five years;

(b) The total of future minimum sublease payments expected to be received under non-cancellable subleases at the balance sheet date;

(e) A general description of the lessee’s significant leasing arrangements including, but not limited to, the following:

(i) The basis on which contingent rent payments are determined;

 (ii) The existence and terms of renewal or purchase options and escalation clauses; and

(iii) Restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and further leasing.

Provided that a Small and Medium Sized Company, as defined in the Notification, may not comply with sub-paragraphs (a), (b) and (e).

Paragraph 37. The lessor should make the following disclosures for finance leases:

 (a) A reconciliation between the total gross investment in the lease at the balance sheet date, and the present value of minimum lease payments receivable at the balance sheet date. In addition, an enterprise should disclose the total gross investment in the lease and the present value of minimum lease payments receivable at the balance sheet date, for each of the following periods:

 (i) Not later than one year;

 (ii) later than one year and not later than five years;

 (iii) later than five years;

 (f) A general description of the significant leasing arrangements of the lessor; and

 (g) Accounting policy adopted in respect of initial direct costs.

Provided that a Small and Medium Sized Company, as defined in the

Notification, may not comply with sub-paragraphs (a) and (f).

Paragraph 38. As an indicator of growth it is often useful to also disclose the gross investment less unearned income in new business added during the accounting period, after deducting the relevant amounts for cancelled leases.

Paragraph 46. The lessor should, in addition to the requirements of AS 6, Depreciation Accounting and AS 10, Accounting for Fixed Assets, and the governing statute, make the following disclosures for operating leases:

(b) The future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periods:

(i) Not later than one year;

(ii) later than one year and not later than five years;

(iii) later than five years;

(d) A general description of the lessor’s significant leasing arrangements; and

(e) Accounting policy adopted in respect of initial direct costs.

(vi) AS 22, Accounting for Taxes on Income

(a) Level IV Non-company entities shall apply the requirements of AS 22, Accounting for Taxes on Income, for Current tax defined in paragraph 4.4 of AS 22, with recognition as per paragraph 9, measurement as per paragraph 20 of AS 22, and presentation and disclosure as per paragraphs 27-28 of AS 22.

(b) Transitional requirements

On the first occasion when a Non-company entity gets classified as Level IV entity, the accumulated deferred tax asset/liability appearing in the financial statements of immediate previous accounting period, shall be adjusted against the opening revenue reserves.

Paragraph 4.4 Current tax is the amount of income tax determined to be payable (recoverable) in respect of the taxable income (tax loss) for a period.

Paragraph 9. Tax expense for the period, comprising current tax and deferred tax, should be included in the determination of the net profit or loss for the period.

Paragraph 20. Current tax should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the applicable tax rates and tax laws.

Paragraph 27. An enterprise should offset assets and liabilities representing current tax if the enterprise: (a) has a legally enforceable right to set off the recognized amounts; and

(b) Intends to settle the asset and the liability on a net basis.

Paragraph 28. An enterprise will normally have a legally enforceable right to set off an asset and liability representing current tax when they relate to income taxes levied under the same governing taxation laws and the taxation laws permit the enterprise to make or receive a single net payment.

(vii) AS 26, Intangible Assets

Paragraphs 90(d)(iii); 90(d)(iv) and 98 relating to disclosures are not applicable to Level IV Non-company entities.

Paragraph 90. The financial statements should disclose the following for each class of intangible assets, distinguishing between internally generated intangible assets and other intangible assets:

(d) A reconciliation of the carrying amount at the beginning and end of the period showing:

(iii) Impairment losses recognized in the statement of profit and loss during the period (if any);

(iv) Impairment losses reversed in the statement of profit and loss during the period (if any);

Paragraph 98. An enterprise is encouraged, but not required, to give a description of any fully amortized intangible asset that is still in use.

(viii) AS 28, Impairment of Assets

(a) Level II and Level III Non-company entities are allowed to measure the ‘value in use’ on the basis of reasonable estimate thereof instead of computing the value in use by present value technique. Consequently, if Level II or Level III Non-company entity chooses to measure the ‘value in use’ by not using the present value technique, the relevant provisions of AS 28, such as discount rate etc., would not be applicable to such an entity. Further, such an entity need not disclose the information required by paragraph 121(g) of the Standard.

(b) Also, paragraphs 121(c)(ii); 121(d)(i); 121(d)(ii) and 123 relating to disclosures are not applicable to Level III Non-company entities.

Paragraph 121. If an impairment loss for an individual asset or a cash-generating unit is recognized or reversed during the period and is material to the financial statements of the reporting enterprise as a whole, an enterprise should disclose:

(c) For an individual asset:

(ii) The reportable segment to which the asset belongs, based on the enterprise’s primary format (as defined in AS 17, Segment Reporting);

(d) for a cash-generating unit: (i) a description of the cash-generating unit (such as whether it is a product line, a plant, a business operation, a geographical area, a reportable segment as defined in AS 17 or other);

Paragraph 123. An enterprise is encouraged to disclose key assumptions used to determine the recoverable amount of assets (cash-generating units) during the period.

(ix) AS 29, Provisions, Contingent Liabilities and Contingent Assets (revised 2016)

Paragraphs 66 and 67 relating to disclosures are not applicable to Level II, Level III and Level IV Non-company entities.

Paragraph 66. For each class of provision, an enterprise should disclose:

 (a) The carrying amount at the beginning and end of the period;

 (b) Additional provisions made in the period, including increases to existing provisions;

 (c) Amounts used (i.e. incurred and charged against the provision) during the period; and

 (d) Unused amounts reversed during the period. Provided that a Small and Medium-sized      Company and a Small and Medium-sized Enterprise (Level II and Level III non-corperate entities), as defined in Appendix 1 to this Compendium, may not comply with paragraph 66 above.

 Paragraph 67. An enterprise should disclose the following for each class of provision:

(a) A brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits;

(b) An indication of the uncertainties about those outflows. Where necessary to provide adequate information, an enterprise should disclose the major assumptions made concerning future events, as addressed in paragraph 41; and

(c) The amount of any expected reimbursement, stating the amount of any asset that has been recognized for that expected reimbursement. Provided that a Small and Medium-sized Company and a Small and Medium-sized Enterprise (Level II and Level III non-cooperate entities), as defined in Appendix 1 to this Compendium, may not comply with paragraph 67 above.

(C) In case of Level IV Non-company entities, generally there are no such transactions that are covered under AS 14, Accounting for Amalgamations, or jointly controlled operations or jointly controlled assets covered under AS 27, Financial Reporting of Interests in Joint Ventures. Therefore, these standards are not applicable to Level IV Non-company entities. However, if there are any such transactions, these entities shall apply the requirements of the relevant standard.

(D) AS 21, Consolidated Financial Statements, AS 23, Accounting for Investments in Associates in Consolidated Financial Statements, AS 27, Financial Reporting of Interests in Joint Ventures (to the extent of requirements relating to Consolidated Financial Statements), and AS 25, Interim Financial Reporting, do not require a Non-company entity to present consolidated financial statements and interim financial report, respectively. Relevant AS is applicable only if a Non-company entity is required or elects to prepare and present consolidated financial statements or interim financial report.