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Explained: How Small and Medium Companies will benefit from higher thresholds

The Corporate Affairs Ministry has expanded the turnover and borrowing thresholds for Small and Medium sized Companies (SMC). A look at the exemptions, and the impact of the change in the definition of SMC.

Written by Karunjit Singh , Edited by Explained Desk | New Delhi |
June 26, 2021 2:46:57 pm
The Corporate Affairs Ministry has increased the turnover and borrowing thresholds for SMCs. (Express Photo: Nirmal Harindran)

The Corporate Affairs Ministry has expanded the turnover and borrowing thresholds for Small and Medium sized Companies (SMC), allowing a larger number of firms to benefit from reporting exemptions under accounting norms. The Indian Express examines the exemptions and the impact of the change in the definition of SMC.

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What is the change?

The Corporate Affairs Ministry has increased the turnover threshold for SMCs to Rs 250 crore from Rs 50 crore, and the borrowing threshold to Rs 50 crore from Rs 10 crore. SMCs are permitted to avail a number of exemptions under the Company (Accounting Standards) Rules 2021 to reduce the complexity of regulatory filings for smaller firms.

Banks, financial institutions, insurance companies and listed companies cannot be classified as SMCs.

Further, any company which is either the holding company or subsidiary of a company that is not an SMC cannot be classified as an SMC.

What are the exemptions available to SMCs that are not available to other firms?

SMC are completely exempted from having to file cash flow statements and provide a segmental break up of their financial performance in mandatory filings.

SMCs can also avail partial reporting exemptions in areas including reporting on employee benefits obligations such as pensions. SMCs are exempted from having to provide a detailed analysis of benefit obligations to employees, but are still required to provide actuarial assumptions used in valuing the company’s obligations to employees.

SMCs are also exempted from having to report diluted earnings per share in their filings. Diluted earnings per share reflect the per share earnings of a company assuming that all options to convert other securities into shares are exercised.

SMCs are also allowed to provide an estimated value in use of assets carried on their balance sheets, and are not required to use present value techniques to arrive at the value in use of assets. The value in use of an asset is the present value of future cash flows arising from the continuous use of an asset and from its disposal at the end of its useful life. Larger companies are required to use present value techniques and disclose the discount rates used in arriving at the value in use of an asset.

Any SMC which opts to avail of any of the exemptions available to them under the Companies Accounting Rules is required to disclose those which it has utilised in its mandatory filings.

How does this impact these firms?

Experts have noted that the move would promote ease of doing business for the firms that would now be included under the definition of SMC.

“The Accounting Standards for SMC, which were notified in December 2006 and amended from time to time, are much simpler as compared to Indian Accounting Standards (Ind AS). These accounting standards involve less complexity in its application, including the number of required disclosures being less onerous,” said Vikas Bagaria, partner, Deloitte India.

Ind AS standards are applied to larger firms, and are largely similar to International Financial Reporting Standards (IFRS) used in most developed jurisdictions.

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