Explained: How Small and Medium-Sized Businesses Will Benefit from Higher Thresholds
June 26, 2021, 2:46 p.m.
The Ministry of Commercial Affairs has widened the turnover and borrowing thresholds for Small and Medium Enterprises (SMCs), allowing more businesses to benefit from reporting exemptions under accounting standards. Indian express examines exemptions and the impact of changing the definition of SMC.
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What is the change?
The Ministry of Commercial Affairs 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 themselves of a number of exemptions under Company Rules (Accounting Standards) 2021 to reduce the complexity of regulatory filings for small businesses.
Banks, financial institutions, insurance companies and listed companies cannot qualify as SMC.
In addition, any company which is either the holding company or the subsidiary of a company which is not an SMC cannot be qualified as an SMC.
What exemptions are available for SMCs that are not available for other companies?
SMCs are totally exempt from the requirement to file cash flow statements and provide a segmental breakdown of their financial performance in the mandatory statements.
SMCs may also benefit from partial reporting exemptions in areas such as the reporting of employee benefit obligations such as pensions. SMCs are exempt from providing a detailed analysis of employee benefit obligations, but are still required to provide actuarial assumptions used to assess the company’s obligations to employees.
SMCs are also exempt from declaring diluted earnings per share in their returns. Diluted earnings per share reflects a company’s earnings per share assuming all options to convert other securities into shares are exercised.
SMCs are also authorized to provide an estimate of the value in use of assets on their balance sheet 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 resulting from the continued use of an asset and its disposal at the end of its useful life. Large companies are required to use present value techniques and disclose the discount rates used to determine the value in use of an asset.
Any SMC that chooses to take advantage of one of the exemptions available to it under corporate accounting rules is required to disclose those it has used in its mandatory declarations.
How does this impact these businesses?
Experts noted that the move would make it easier to do business for companies that would now be included in the definition of SMC.
“The accounting standards for SMC, which were notified in December 2006 and amended from time to time, are much simpler than the Indian accounting standards (Ind AS). These accounting standards involve less complexity in their application, including the number of disclosures required being less onerous, ”said Vikas Bagaria, Partner, Deloitte India.
Ind AS standards are applied to large companies and are broadly similar to International Financial Reporting Standards (IFRS) used in most developed jurisdictions.