MCA expands small firm definition, raises turnover and borrowing limits

The ministry of corporate affairs has expanded the definition of small and medium companies (SMC), raising their turnover and borrowing limits. This would enable a wider set of companies to avail of greater flexibility in the accounting standards, according to a notification issued on Wednesday. 

The 388-page notification has defined small and medium companies as unlisted entities which are not banks, financial institutions or insurance firms and have a turnover of up to Rs 250 crore and borrowings up to Rs 50 crore in the immediately preceding accounting year. The threshold has been Rs 50 crore and Rs 10 crore for turnover and borrowings under the general accounting standards.   

The change in definition is for accounting purposes, experts said.

“SMC which is a holding company or subsidiary company of a non-SMC will not qualify as a small and medium company,” the notification said. 

“The notification is self-contained accounting standards tailored for the needs and capabilities of smaller businesses and acts as a common set of accounting standards that will be mandatory in its application to SMC in preparing its general purpose financial statements. The accounting standards for SMC, which were earlier notified in December 2006 and amended from time to time, are much simpler as compared to Indian Accounting Standards,” said Vikas Bagaria, Partner, Deloitte India.

Experts have said that these accounting standards involve less complexity in its application in terms of the number of required disclosures which are less onerous. 

The notification also says that an existing company which was not a small and medium company previously but became so subsequently would not be able to avail of any exemptions in accounting standards. It can avail of these exemptions if it continues as a small and medium company for two consecutive accounting periods.

“The limits are in line with a similar increase in threshold done by ICAI (Institute of Chartered Accountants of India) for non-corporate entities. The revised criteria will help a number of companies and will promote ease of doing business,” said Sanjeev Singhal, Partner, SR Batliboi & Co LLP. 

For companies which have a turnover of less than Rs 500 crore and net worth of less than Rs 250 crore, the general purpose accounting standards of ICAI apply. Rest of the companies follow the Indian accounting standards (IndAS). 

The MCA notification said that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed by companies. “The disclosure of significant accounting policies as such should form part of the financial statements and the significant accounting policies should normally be disclosed in one place.”