Change is the only constant." This holds especially true in the dynamic world of financial regulations. The Institute of Chartered Accountants of India (ICAI), in its 433rd meeting held from August 13-15, 2024, introduced significant revisions to the classification and compliance requirements for non-company entities under Accounting Standards (AS). These amendments, effective from April 1, 2024, bring clarity and align reporting standards with practical business needs.
The ICAI has simplified and refined the classification of non-company entities, restructuring them into two broad categories:
- Micro, Small, and Medium-Sized Entities (MSMEs)
- Large Entities
This restructuring also revises the applicability of Accounting Standards, emphasizing proportional compliance based on the size and complexity of the entity.
Key Highlights of the Revised Framework
1. Simplified Categorization of Entities
Entities are now classified based on size and nature into:
| Category | Criteria |
|---|---|
| MSMEs | Entities meeting specific thresholds for turnover, borrowings, and ownership structure (explained below). |
| Large Entities | Entities exceeding these thresholds or those listed (or in the process of listing) on a stock exchange. |
2. Criteria for MSMEs
To qualify as an MSME, an entity must meet all the following conditions:
| Parameters | Threshold |
|---|---|
| Listing Status | Equity or debt securities are not listed or not in the process of being listed. |
| Nature of Business | Entity is not a bank, financial institution, or insurance company. |
| Turnover (excluding other income) | ≤ ₹250 crore in the immediately preceding accounting year. |
| Borrowings | ≤ ₹50 crore at any time during the immediately preceding accounting year. |
| Ownership Structure | Not a holding or subsidiary of an entity that does not qualify as an MSME. |
💡 Key Insight: Entities failing to meet any one condition will be classified as Large Entities.
3. Changes in Naming Levels
| Old Level | New Classification |
|---|---|
| Level I | Large Entities |
| Level II, III, IV | Merged into MSMEs |
Applicability of Accounting Standards (AS)
For Large Entities
- Must comply fully with all Accounting Standards.
For MSMEs
- Eligible for specific exemptions and relaxations, designed to ease compliance without compromising transparency.
Exemptions Available for MSMEs
MSMEs are relieved from certain complex reporting requirements under Accounting Standards.
| Accounting Standard (AS) | Relaxation/Exemption |
|---|---|
| AS 17: Segment Reporting | Full exemption from disclosing segment information. |
| AS 20: Earnings per Share | No requirement to disclose earnings per share. |
| AS 18: Related Party Disclosures | Disclosure applicable only if turnover exceeds ₹50 crore or borrowings exceed ₹10 crore. |
| AS 15: Employee Benefits | Simplified methods for defined benefit plans, with no requirement for detailed actuarial valuations. |
| AS 28: Impairment of Assets | Simplified approach for estimating "value in use" and relaxed disclosure requirements. |
| AS 19: Leases | Exempt from detailed lease disclosures such as fair value and future lease commitments. |
📌 Important: MSMEs availing exemptions must disclose the specific standards and exemptions applied in their financial statements.
Illustrative Example
Case Study: Ashu’s Enterprise
Ashu operates a mid-sized textile export business. For FY 2023-24, its financial details are:
- Turnover: ₹180 crore
- Borrowings: ₹45 crore
- Ownership: Not a subsidiary or holding of a larger entity
- Listing Status: Not listed or in the process of listing
Analysis:
- Ashu’s enterprise qualifies as an MSME under the revised classification.
- It can avail exemptions under AS 15, AS 28, and other standards, provided proper disclosures are included in the financial statements.
Disclosure Norms for MSMEs
Status Disclosure:
- Clearly state in the financial statements whether the entity qualifies as an MSME and list the exemptions availed.
Transition Rules:
- Entities moving out of the MSME category must comply fully from the current accounting year.
- Adjustments for past periods are not mandatory but require disclosure.
New MSMEs:
- Entities classified as MSMEs must maintain this status for two consecutive years to avail exemptions.
Partial Exemption Use:
- MSMEs may selectively apply exemptions, but the approach must not mislead users of financial statements.
Impact Analysis
| Aspect | Impact of Revised Framework |
|---|---|
| Simplification | Uniformity in classification removes ambiguity and simplifies compliance. |
| Cost Efficiency for MSMEs | Exemptions reduce compliance costs and administrative burdens for smaller entities. |
| Transparency for Large Entities | Enhanced financial reporting for larger entities ensures better governance and investor confidence. |
| Flexibility with Accountability | MSMEs can choose exemptions, but disclosure requirements ensure accountability and transparency. |
Conclusion
This revision is a significant step toward right-sizing compliance requirements for entities, balancing the scales between ease of doing business and maintaining financial transparency. While MSMEs benefit from reduced reporting obligations, larger entities are held to higher standards to ensure robustness in financial reporting.
