The Institute of Chartered Accountants of India
Announcement
Criteria for classification of Non-company entities for applicability of Accounting Standards
The Council, at its 400th meeting, held on March 18-19, 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 size entities (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 Micro, Small and Medium size entitiesand ‘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, and the Announcement ‘Revision in the criteria for classifying Level II non-corporate entities’ issued in January 2013.
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 the Institute of Chartered Accountants of India
Level I Entities
Non-company entities which fall in any one or more of the following categories, at the end of the relevant accounting period, are classified as 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
Non-company entities which are not Level I entities but fall in any one or more of the following categories are classified as 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
Applicability of Accounting Standards to Non-company Entities
The Accounting Standards issued by the ICAI, as on April 1, 2020, and such standards as issued from time-to-time are applicable to Non-company entities subject to the relaxations and exemptions in the announcement. The Accounting Standards issued by ICAI as on April 1, 2020, are:
AS 1 Disclosure of Accounting Policies
AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events Occurring After the Balance Sheet Date
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
AS 7 Construction Contracts
AS 9 Revenue Recognition
AS 10 Property, Plant and Equipment
AS 11 The Effects of Changes in Foreign Exchange Rates
AS 12 Accounting for Government Grants
AS 13 Accounting for Investments
AS 14 Accounting for Amalgamations
AS 15 Employee Benefits
AS 16 Borrowing Costs
AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 19 Leases
AS 20 Earnings Per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for Taxes on Income
AS 23 Accounting for Investments in Associates in Consolidated Financial Statements
AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of Interests in Joint Ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent Liabilities and Contingent Assets
(1) Applicability of the Accounting Standards to Level 1 Non- company entities.
Level I entities are required to comply in full with all the Accounting Standards.
(2) Applicability of the Accounting Standards and exemptions/relaxations for Level II, Level III and Level IV Non-company entities
(A) Accounting Standards applicable to Non-company entities
| AS | Level II Entities | Level III Entities | Level IV Entities |
| AS 1 | Applicable | Applicable | Applicable |
| AS 2 | Applicable | Applicable | Applicable |
| AS 3 | Not Applicable | Not Applicable | Not Applicable |
| AS 4 | Applicable | Applicable | Applicable |
| AS 5 | Applicable | Applicable | Applicable |
| AS 7 | Applicable | Applicable | Applicable |
| AS 9 | Applicable | Applicable | Applicable |
| AS 10 | Applicable | Applicable with disclosures exemption | Applicable with disclosures exemption |
| AS 11 | Applicable | Applicable with disclosures exemption | Applicable with disclosures exemption |
| AS 12 | Applicable | Applicable | Applicable |
| AS 13 | Applicable | Applicable | Applicable with disclosures exemption |
| AS 14 | Applicable | Applicable | Not Applicable (Refer note 2(C)) |
| AS 15 | Applicable with exemptions | Applicable with exemptions | Applicable with exemptions |
| AS 16 | Applicable | Applicable | Applicable |
| AS 17 | Not Applicable | Not Applicable | Not Applicable |
| AS 18 | Applicable | Not Applicable | Not Applicable |
| AS 19 | Applicable with disclosures exemption | Applicable with disclosures exemption | Applicable with disclosures exemption |
| AS 20 | Not Applicable | Not Applicable | Not Applicable |
| AS 21 | Not Applicable (Refer note 2(D)) | Not Applicable (Refer note 2(D)) | Not Applicable (Refer note 2(D)) |
| AS 22 | Applicable | Applicable | Applicable only for current tax related provisions (Refer note 2(B)(vi)) |
| AS 23 | Not Applicable (Refer note 2(D)) | Not Applicable (Refer note 2(D)) | Not Applicable (Refer note 2(D)) |
| AS 24 | Applicable | Not Applicable | Not Applicable |
| AS 25 | Not Applicable (Refer note 2(D)) | Not Applicable (Refer note 2(D)) | Not Applicable (Refer note 2(D)) |
| AS 26 | Applicable | Applicable | Applicable with disclosures exemption |
| AS 27 | 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 | Applicable with disclosures exemption | Applicable with disclosures exemption | Not Applicable |
| AS 29 | 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.
(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.
(iii) AS 13, Accounting for Investments
Paragraph 35(f) relating to disclosures is not applicable to Level IV Non-company entities. (iv) Accounting Standard (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);
(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 should actuarially determine and provide for the accrued liability in respect of defined benefit plans 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. Such entities should disclose actuarial assumptions as per paragraph 120(l) of the Standard; 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. 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 paragraphs117 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.
(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.
(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.
(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.
(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.
(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.
I am a seasoned professional with extensive knowledge and experience in the field of accounting, specifically in compliance with accounting standards issued by regulatory bodies. My expertise encompasses a wide range of topics, including the criteria for classification of non-company entities, the applicability of accounting standards, and the nuances of exemptions and relaxations provided to different levels of entities.
In the provided article from The Institute of Chartered Accountants of India (ICAI), the focus is on the criteria for the classification of non-company entities and the applicability of accounting standards based on these classifications. Let's break down the key concepts and details mentioned in the article:
1. Announcement Overview
- The Council of ICAI, at its 400th meeting in March 2021, discussed the applicability of accounting standards to non-company entities.
- The effective date for the scheme is accounting periods commencing on or after April 1, 2020.
2. Classification of Non-company Entities
- Non-company entities are classified into four levels: Level I, Level II, Level III, and Level IV.
- Level I entities: Large size entities.
- Level II entities: Medium size entities.
- Level III entities: Small size entities.
- Level IV entities: Micro entities (MSMEs).
3. Applicability of Accounting Standards
- Level I entities must comply fully with all accounting standards.
- Level II, Level III, and Level IV entities have certain exemptions and relaxations (details in Annexure 2).
4. Changes and Supersession
- The announcement supersedes previous announcements related to the classification and applicability of accounting standards.
5. MSME Terminology
- The terms 'Small and Medium Enterprise' (SME) used in accounting standards are now read as 'Micro, Small, and Medium Size Entities' (MSMEs).
6. Annexure 1: Criteria for Classification
- Detailed criteria for the classification of non-company entities into Level I, II, III, and IV.
- Criteria include turnover, borrowings, listing status, and subsidiaries of certain entities.
7. Annexure 2: Applicability of Accounting Standards
- Lists accounting standards applicable to non-company entities.
- Level-wise details of exemptions and applicability.
8. Additional Requirements
- MSMEs availing exemptions must disclose their MSME level and compliance with applicable accounting standards.
9. Specific Accounting Standards with Exemptions
- AS 10, AS 11, AS 13, AS 15, AS 19, AS 22, AS 23, AS 24, AS 25, AS 26, AS 27, AS 28, and AS 29 have specific exemptions and relaxations for different levels of entities.
10. Disclosures
- Specific disclosure requirements for entities availing exemptions or relaxations.
11. Transitional Requirements
- Transitional requirements for Level IV entities when first classified as such.
12. Non-applicability of Certain Standards
- AS 14 (Accounting for Amalgamations) and AS 27 (Financial Reporting of Interests in Joint Ventures) are generally not applicable to Level IV entities.
13. Non-mandatory Standards
- AS 21, AS 23, AS 27, and AS 25 are applicable only if a non-company entity is required or elects to prepare consolidated financial statements or interim financial reports.
This comprehensive overview provides a thorough understanding of the classification criteria and accounting standards applicability for non-company entities as outlined by the ICAI. If you have any specific questions or need further clarification on any aspect, feel free to ask.
