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How relaxation in compliance norms will impact small companies

An opportunity to make doing business easier came in the form of higher categorization limits as small and medium-sized enterprises (SMC). The objective is to reduce the burden of compliance and the time required to prepare the financial statements. As a result of this notification, a large number of companies will be included in the definition of SMC companies.x

This amendment comes on the heels of recent changes by the government to the Small and Medium Business Development Act 2006, which has increased the upper limit of registration rotation requirements for small, medium and micro businesses.

Why was this amendment so crucial?

These limits have not been adjusted for years and, given general economic growth, it has been necessary to increase these limits. The benefits of this modification will now be available to a larger group of companies.

The number of accounting standards and disclosure requirements has increased over the years. These standards are constantly being revised to bring them in line with international requirements. The implementation of all these changes means the need for an additional team of accountants.

The duration required to prepare financial statements has increased in view of the various disclosure requirements. This has also increased the compliance burden on SMC companies.

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Key changes in the Act

Under the new rules, the upper limit of the annual sales requirement for the SMC rating has been increased to Rs 250 crore from Rs 50 crore and the upper limit for loans has been increased to Rs 50 million from Rs 10 crore. . These new rules will replace the existing rules that were established in 2006 and are applicable to accounting periods beginning on or after April 1, 2021.

Some of the main modifications, in addition to the rating limits mentioned above, are listed below:

  1. Exemptions

SMC is exempted from complying with Accounting Standard 3 "Statement of Cash Flows" and Accounting Standard 17 "Segment Information". However, the AS 3 exemption will be suitable only for companies with a paid-up capital of Rs 50 lakhs and a turnover of Rs 2 crore. Outside these limits, the preparation of a cash flow statement is mandatory according to Section 2 (40) of the Companies Act 2013.

  1. Relaxations

Exemption from detailed disclosures required by Accounting Standard 15 - “Employee benefits”. Also, there is a simplification in terms of compromise evaluation. This will reduce the cost to companies of the actuarial valuation of the obligation.

The accounting standard requires detailed disclosures regarding operating leases and finance leases. The new rules exempt SMC companies from such disclosures.

It is not necessary to disclose diluted earnings per share.

For the purposes of the impairment provision, management's estimates may be used instead of present value techniques. In many cases, this will also reduce the cost of using the service of experts or appraisers.

What does not change

These amendments have no impact on the compliance requirements of listed companies, banks, financial institutions and insurance companies that must continue to comply with all accounting standards or Indian accounting standards, as applicable. Furthermore, under the transition provisions, to enjoy the exemptions / facilities available to SMC, companies that meet the SMC criteria for the first time have to wait two consecutive accounting periods in which they must continue to meet the SMC criteria.

Also Read: 10 questions to ask yourself before investing in any financial product

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