Background
Many Indian corporates have set up
Special Purpose Not-for-Profit Entities (NFP) to undertake corporate social
responsibility (CSR) activities as required u/s. 135 of the Companies Act,
2013. The CSR activities are either undertaken by the Company directly or
through a charitable trust under The Indian Trusts Act, 1882, section 8 company
under the Companies Act 2013 or a society under the Societies Registration Act,
1860. The sponsoring company will provide adequate funds or donations to the
trust, society or the section 8 company so that it can carry out the relevant
activities as required under the Companies Act, 2013. A question arises as to
whether such NFP should be consolidated under Ind AS 110, Consolidated
Financial Statements by the sponsoring company.
Under Ind AS 110, an investor
controls an investee and consequently consolidates it when it is exposed, or
has rights, to variable returns from its involvement with the investee and has
the ability to affect those returns through its power over the investee. Thus,
an investor controls an investee if and only if the investor has all the
following:
(a) Power
over the investee,
(b) Exposure,
or rights, to variable returns from its involvement with the investee, and
(c) The
ability to use its power over the investee to affect the amount of the
investor’s returns.
Arguments supporting consolidation of the
NFP
Following are the arguments
supporting consolidation:
- Under Ind AS 110, variable returns are seen more broadly, and
will include exposure to loss or expenses from providing funds, donation,
credit or liquidity support and intangible benefits on reputation and image
from good governance practices. By hand-picking the members of the governing
body of the NFP, the sponsor of the NFP ensures that it has power over the NFP
either explicitly or implicitly. Using these powers, the sponsoring company
ensures that the NFP undertakes the desirable CSR activity, which meets its compliance
and other needs.
Ind AS 110 does not apply to
post-employment benefit plans or other long-term employee benefit plans to
which Ind AS 19, Employee Benefits, applies. However, there are no such
exemptions for NFPs. Moreover, the accounting for long term employee benefit
plans under Ind AS 19 effectively recognises the net assets and liabilities of
the Trust, i.e., the net defined benefit liability (asset) is determined after
taking into account the fair value of the plan assets and the relevant disclosures
are included in the separate financial statements and CFS of the company.
The NFP is controlled by the
sponsoring company for its own benefit and is not specifically exempted from
preparing CFS. Hence, an NFP should be consolidated.
- CSR activities prior to the Companies Act, 2013 were undertaken
voluntarily. After the Companies Act, 2013, it has also become a
quasi-mandatory requirement. If a company does not spend on CSR, as required by
the Companies Act, 2013 it has to make appropriate disclosures in the
Director’s report. There are numerous activities a company has to undertake for
the purposes of complying with the various laws of the land. The cost of all
such compliance activities are included in the separate and consolidated
financial statements (CFS). Since CSR is a cost incurred to conduct business in
the country as required by legislation, it should be included and consolidated
in the financial statements. The NFP is merely an extension of the Company
created to ensure compliance with the Companies Act, 2013. A company that
undertakes CSR activities directly would have in any case included the CSR
spend in its separate financial statements and CFS. Whether the CSR activities
are under taken directly or through a trust, society or company, the outcome
with respect to financial statements should be the same.
- Even in cases, where the CSR activity is not linked to compliance
but is undertaken for altruistic purposes, consolidation will still be
required. This is because in such cases, for reasons already described above,
the company has an exposure to variable returns in the form exposure to loss
from funding or providing liquidity support for running the CSR entity. In
addition, there will be intangible returns by way of enhancement or damage to
reputation and image.
Conclusion
The
author believes that the NFP created for CSR activities should be consolidated
in accordance with the requirements of Ind AS.
