Corporate Social Responsibility (CSR) - Activities, Reporting & Accounting

CSR CONCEPTS

Corporate Responsibility is the continuing commitment by business to behave ethically and a positive continuity towards social and economic development at large. It is the contribution of the corporate sector for philanthropic causes like education, health, water, environment and community welfare. Corporate responsibility evokes from good governance.

Good Governance covers moral values, powers, dedication, self-management, sagacity, self-conduct, synergy, simplicity and honesty.

Corporate Governance is the system by which the corporate entities are directed and controlled. It encompasses the entire mechanics of the functioning of a company and attempts to put in place a system of checks and balances between the shareholders, directors, auditors and the management.

Values are the soul of a company that defines its character and personality. Values guide, shape and influence the behavior and actions of the board of directors. The core values of a business enterprise are shaped around the belief that enterprises exist to serve society.

At the heart of the value system is an unwavering commitment to integrity, ethical conduct, meritocracy, teamwork and abiding concern for stakeholders.

GLOBAL CODES & STANDARDS ON CSR

1. United Nations Global Compact: The United Nations Global Compact is a United Nations initiative to encourage businesses worldwide to adopt sustainable and socially responsible policies, and to report on their implementation.

2. Global Reporting Initiative (GRI): GRI is an international independent organization that helps businesses, governments and other organizations understand and communicate the impact of business on critical sustainability issues such as climate change, human rights, corruption and many others.

3. ISO 14000: ISO 14000 is a series of environmental management standards developed and published by the International Organization for Standardization ( ISO ) for organizations. The ISO 14000 standards provide a guideline or framework for organizations that need to systematize and improve their environmental management efforts.

4. ISO 26000: ISO 26000:2010 is intended to assist organizations in contributing to sustainable development.

5. Organisation for Economic Co-operation and Development (OECD): The mission of the OECD is to promote policies that will improve the economic and social well-being of people around the world.

6. International Labour Organisation Conventions: The International Labour Organization Conventions aim to improve the labour standards of people around the world.

7. National voluntary guidelines on social, environmental and economic responsibilities of business, 2011: These guidelines released in July 2011 by the Ministry Of Corporate Affairs, Government Of India, provide a robust framework that may be adopted voluntarily by companies to address interests of various stakeholders, including employees, customers and investors. Accordingly, the SEBI has mandated listed companies to report on Environmental, Social and Governance (ESG) initiatives undertaken by them.

8. Section 135 of the Companies Act, 2013 (the Act):

Section 135 of the Act requires the Board of Directors of every Company having :

a) Net Worth of Rupees 500 crore or more; or

b) Turnover of Rupees 1,000 crore or more; or

c) Net Profit of Rupees 5 crore or more,

during any financial year, to ensure that the company spends in every financial year atleast 2% of the average net profits of the company made during the three immediately preceding financial years on CSR in pursuance of its policy in this regard.

The Act requires such companies to constitute a CSR Committee which shall formulate and recommend to the Board a Corporate Social Responsibility Policy which shall indicate the CSR Activities to be undertaken by the company as specified in Schedule VII to the Act.

CSR ACTIVITIES AS PER THE ACT

1. Schedule VII to the Act provides the activities that may be included by companies in their CSR Policies Activities. The same are mentioned in brief below:

a) Eradication of extreme hunger and poverty;
b) Promotion of Education;
c) Promoting Gender Equity;
d) Reducing Child Mortality and Improving Maternal Health;
e) Women Empowerment;
f) Combating HIV-AIDS, malaria and other disease;
g) Ensuring Environmental Sustainability;
h) Employment Enhancing Vocational Skills;
i) Social Business Projects;
j) Contribution to Prime Minister’s Relief Fund and other such State and Central Funds;
k) Rural Development Projects;
l) Slum Area Development;
m) Protection of National Heritage;
n) Measures for the benefit of armed forces veteran, war widows and their dependents;
o) Promote Sports; and
p) Such other matters as may be prescribed.

2. CSR Expenditure shall include all expenditure including contribution to corpus, for projects or programs relating to CSR activities approved by the Board on recommendation of its CSR Committee, but does not include any expenditure on an item not in conformity or not in line with activities which fall within the purview of Schedule VII of the Act.

3. Only CSR activities undertaken in India will be taken into consideration.

4. Activities meant exclusively for employees and their families or undertaken in pursuance of the normal course of business will not qualify for CSR activities.

5. The amount spent in excess of 2% of the average net profits of immediately preceding 3 years cannot be carried forward for set off against the CSR Expenditure required to be spent in the future.

6. The Surplus arising out of CSR activities will have to be reinvested into CSR initiatives, and this will be over and above the 2% figure.

7. The company can implement its CSR activities through the following methods:

a) Directly on its own;

b) Through its own non-profit foundation set- up so as to facilitate this initiative;

c) Through independently registered non-profit organisations that have a record of at least three years in similar such related activities;

d) Collaborating or pooling their resources with other companies.

Further, the company ought to specify the project or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.

CSR GOVERNANCE AND REPORTING AS PER THE ACT

1. The CSR committee will be responsible for preparing a detailed plan on CSR activities, including the expenditure, the type of activities, roles and responsibilities of various stakeholders and a monitoring mechanism for such activities.

2. The Act requires that the Board of the company shall, after taking into account the recommendations made by the CSR committee, approve the CSR policy for the company and disclose its contents in their report and also publish the details on the company’s official website, if any, in such manner as may be prescribed.

3. The Format for the Annual Report on CSR Expenditure to be included in the Board’s Report is as under:

a) Brief Outline of the Company’s CSR Policy, including overview of the projects or programs to be undertaken.

b) Composition of the CSR Committee.

c) Average Net Profit of the Company for the last 3 financial years. 21

d) Prescribed CSR Expenditure.

e) Details of the CSR Spent during the financial year (FY):
– Total amount to be spent for the FY;

– Amount unspent, if any;

– Below Details of the amount spent during the FY

(i) CSR Project or Activity identified;

(ii) Sector in which the project is covered;

(iii) Projects or Programs – a) Local area or other; b) Specify the state or district where the project or programs was undertaken

(iv) Amount Outlay (budget) project or program wise

(v) Amount spent on the project or programs – a) Direct expenditure on projects or programs; b) Overheads

(vi) Cumulative Expenditure up to the reporting period

(vii) Amount spent: Direct or through implementing agency

f) If the company fails to spend the prescribed amount, the Board, in its report, shall specify the reasons.

g) A responsibility statement of the CSR Committee that the implementation and monitoring of CSR Policy, is in compliance with CSR objectives and policy of the company.

4. The amount of expenditure incurred on CSR Activities shall be disclosed by way of a Note to the statement of profit and loss account. It shall be recognized as a separate line item as ‘CSR Expenditure’ and consist of the following:

a) Gross Amount required to be spent by the company during the year.

b) Below disclosure, may be made to the notes to the cash flow statement, where applicable:

Amount spent during the year on In Cash Yet to be paid in Cash Total

Construction / Acquisition of any Asset
On the purposes other than above

c) Details of related party transactions eg. Contribution to a Trust controlled by the company in relation to CSR Expenditure as per Accounting Standard 18, Related Party Disclosure.

d) Provision for CSR Expenditure and movement in the same needs to be presented as per Schedule III to the Act.

CSR EXPENDITURE – ACCOUNTING ASPECTS

1. “Average Net Profit” is the amount as calculated in accordance with the provisions of section 198 of the Act.

2. “Net Profit” means the net profit of the company as per its financial statement prepared in accordance with the applicable provisions of the Act. It shall not include the following:

a) Profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and

b) Any dividend received from other companies in India, which are covered under and complying the provisions of section 135 of the Act

3. “Net Worth” means the aggregate value of paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write back of depreciation and amalgamation.

In case of a foreign company covered under provisions of section 135 of the Act, net profit means the net profit prepared in terms of section 381(1)(a) read with section 198 of the Act.

4. Some Accounting Issues:

a) If the Company has already undertaken CSR Activity for which a liability has been incurred by entering into a contractual obligation, then in accordance with 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 recognized in the financial statement.

b) In case the expenditure incurred by the company is of such nature which may give rise to an ‘asset’, the below treatment is to be appropriated:

(i) Where the control of the ‘asset’ is transferred by the company, it should not be recognized as an ‘asset’ in its books and such expenditure would need to be charged to the statement of profit and loss as and when incurred;

(ii) Where company retains the control of the ‘asset’ then it would need to be examined whether any future economic benefits accrue to the company. Future economic benefits from a ‘CSR Asset’ would not flow to the company as any surplus from CSR cannot be included by the company in business profits in view of Rule 6(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014.

c) In case where the company supply goods manufactured by it or render services as CSR activities, the expenditure incurred should be recognized when the control on the goods manufactured by it is transferred or the allowable services are rendered by the employees.

The goods manufactured by the company should be valued in accordance with the principles prescribed in Accounting Standard 2, Valuation of Inventories. The services rendered should be measured at cost. Indirect Taxes on the goods and services so contributed will form part of the CSR Expenditure.

d) The surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company as per Rule 6(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014.

For accounting purposes, such surplus would be considered as income. However as the surplus cannot be a part of the business profits of the company, the same should immediately be recognized as liability for CSR expenditure in the balance sheet and recognized as a charge to the statement of profit and loss.

Salary paid by the companies to regular CSR staff as well as to volunteers to the Companies can be factored into CSR project cost as part of the CSR expenditure.

Expenditure incurred by Foreign Holding Company for CSR activities in India will qualify as CSR spend of the Indian subsidiary if, the CSR expenditure are routed through Indian subsidiaries and if the Indian subsidiary is required to do so as per Section 135 of the Act.

CSR – ROLE OF PROFESSIONALS

The corporate sector depends on professionals for governance, management and growth. Professionals can significantly contribute in discharge of social responsibilities as under:

a) Comply with the legal and regulatory framework of companies in letter and spirit by true and fair financial disclosure and tax compliance.

b) Advising on best corporate governance practices, business values, policies, plans, execution and discharging social responsibility.

c) Advising on business models where profit making and social welfare go hand in hand.

d) Advising on preferred local area around the operations of companies for spending the amount earmarked for CSR activities.

e) Advising on viability of public-private partnership (PPP) and corporate-aided community projects.

f) Carry out audit on the below social areas:

1. Social Responsibility Audit;

2. Environmental Audit;

3. Waste Management Audit.