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National Seminar on IND-AS : A Road Map for IFRS in India

VVPGC March 18 & 19,2016

CORPORATE SOCIAL RESPONSIBILITY ACCOUNTING IN IFRS REGIME

Sahana S
Research Scholar,
Vidyavardhaka Research Foundation,
Vidyavardhaka First Grade College Campus,
Mysuru 570021
sahanashivakumar.04@gmail.com
Mob: 7204361905

Dr. S MariGowda
Professor,
Department of Commerce,
Vidyavardhaka First Grade College, PG Centre,
Mysuru 570021
mari_marigowda@yahoo.com
Mob: 9448609438.

Abstract

The accounting standards have made the reporting of various economic activities of a
business to be uniform and systematic, till date. IFRS came into being, intending to bring
about harmonisation in the accounting practices that were followed in the various
countries throughout the world. India is converging with IFRS to concord with the global
accounting practices. Interest in CSR is much more wide ranging than simply an interest in
the financial impacts on society. With the Companies Act, 2013 being passed in India,
Companies are mandated to invest certain part of their profits beyond business, for the
larger good of society. This social spending that the companies make is to be reported
annually from the Financial Year 2014-15. A significant contribution from the accounting
bodies around the world and IASB in particular towards having a fair accounting
treatment for CSR spending is in need.

The article concentrates initially about how firms report on social and environmental
issues. It then provides a review of some of the research undertaken on the extent of the
reporting on CSR and sustainability more generally. Finally, it outlines the involvement of

ISBN : 978-93-5254-333-5
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National Seminar on IND-AS : A Road Map for IFRS in India
VVPGC March 18 & 19,2016

the profession of accounting in adoption and promotion of corporate social and


environmental responsibility.

Keywords: International Financial Reporting Standards (IFRS), Corporate Social


Responsibility (CSR), Companies Act 2013, Corporate Social Spending, Corporate Social
Reporting

1.1 Introduction

The term CSR encompasses a variety of issues revolving around companies interactions
with society. The sorts of issues covered include ethics, governance, social activities such
as philanthropy and community involvement, product safety, equal opportunities, human
rights and environmental activities. When considering CSR from the perspective of the
accounting profession, such consideration is necessarily and inextricably linked with social
(and environmental) reporting or accounting. It could be seen that the amount spent on
Corporate Social Activities has not been properly accounted as no norm or standard is
available at present. But the observation reveals that Corporate Social Reporting, Social
and Environmental Accounting or Corporate Social Disclosures have been variedly used in
Annual Reports. The article provides a review of some of the research undertaken on the
extent of reporting. It also reviews the involvement of the profession of accounting in
adoption and promotion of corporate social spending, and verification of social and
environmental reports.

India is the first country in the world to have mandated contribution towards Corporate
Social Responsibility by the business houses. The Companies Act 2013, in the Section 135,
lays down the rules and ways for the Corporate Social spending. This has led to a lot of
perplexity, and accountants have an important contribution to make to the debate
surrounding Corporate Social Reporting. The major element of contribution that could be
made is, of setting a standard for Corporate Social Reporting which will help for quality
financial reporting.

1.2 The Problem

Accounting Standards enhances quality, transparency, comparability and also helps for
calculating the appropriate value for the business with regard to the item presented in
the Financial Statements. However, the recognition, measurement and disclosure criteria
should be observed while treating the elements that make up the Financial Statements.
With the Companies Act 2013 being passed, it is observed that, corporate entities must
earmark certain percentage of their profits towards social spending, but the spending
should be made in accordance with the rules laid down in the Section 135 of the
Companies Act 2013 and also observing the Income Tax provisions. The spending made by

ISBN : 978-93-5254-333-5
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National Seminar on IND-AS : A Road Map for IFRS in India
VVPGC March 18 & 19,2016

the corporate entities in fulfilling or honouring of the Corporate Social Responsibility


aspects may be for short term or long term benefits of the society. But the lack of
accounting regulation in recognising, measuring and disclosing of the different types of
social spending leads to impair the real value of the organisation. Hence the efforts
should be made to make the spending to bring into the fold of the accounting.

1.3 Literature Review

1.3.1 Social and Environmental Accounting

Gray et al. provide the most useful and commonly used definition of SEA. They describe it
as: Communicating the social and environmental effects of organizations economic
actions to particular interest groups within society and to society at large. As such it
involves extending the accountability of organizations (particularly companies), beyond
the traditional role of providing a financial account to the owners of capital, in particular,
shareholders.

Rob Gray has stated in his article about social accounting as, the preparation and
publication of an account about an organisation's social, environmental, employee,
community, customer and other stakeholder interactions and activities and, where,
possible, the consequences of those interactions and activities. The social account may
contain financial information but is more likely to be a combination of quantified non-
financial information and descriptive, non-quantified information. The social account may
serve a number of purposes but discharge of the organisation's accountability to its
stakeholders must be the clearly dominant of those reasons and the basis upon which the
social account is judged.

Competing demands from stakeholders has led researchers to consider stakeholder


management as a driver of CSR activity and reporting (Gray et al., 1996)

1.3.2 Theories on CSR

Theoretical work on CSR accounting has produced a number of theories as to the


motivation of firms to report or disclose information on their CSR activities. Legitimacy
theory is one such theory and suggests that reporting is used as a communication
mechanism to inform and/or manipulate the perceptions of the firms actions. The
majority of studies have found evidence to support the notion that firms use
communication or accounting to defend or maintain legitimacy in the eyes of society
and/or their stakeholders. Stakeholder theory extends legitimacy arguments to consider
not only society as a whole but particular stakeholder groups (Deegan, 2002).

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National Seminar on IND-AS : A Road Map for IFRS in India
VVPGC March 18 & 19,2016

Corporate Social Responsibility Rules under Section 135 of the Companies Act, 2013,
Guiding Principle states that CSR is the process by which an organization thinks about
and evolves its relationships with stakeholders for the common good, and demonstrates
its commitment in this regard by adoption of appropriate business processes and
strategies. Thus CSR is not charity or mere donations. CSR is a way of conducting business,
by which corporate entities visibly contribute to the social good. Socially responsible
companies do not limit themselves to using resources to engage in activities that increase
only their profits. They use CSR to integrate economic, environmental and social
objectives with the companys operations and growth.

1.3.3 Accounting Standards and Frameworks

A conceptual framework is a constitution which underpins sound theoretical base for


accounting standards. A conceptual framework is defined as a coherent system of
interrelated objectives and fundamentals that is expected to lead to consistent standards
that prescribes the nature, function and limits of financial accounting and reporting
(Deegan, 2006). A sound conceptual framework should also include the corporate social
spending, as the social spending is gaining momentum all over the world and the
framework itself is not a static one. Hence corporate spending obligation should also be
included in the framework.

The objective of general purpose financial reports is described as being to provide


relevant and reliable information to assist users to make and evaluate decisions about the
allocation of scarce resources and to allow management and governing bodies to
discharge their accountability (ASRB, 1990), hence a broad interpretation could be that
this could include non-financial information such as on social or environmental impacts.

The adoption or convergence of International Financial Reporting Standards (IFRS) in


many countries has meant the adoption of Framework for the Preparation and
Presentation of Financial Statements (the Framework). In this Framework, the principal
classes of users of financial statements are: present and potential investors, employees,
lenders, suppliers and other trade creditors, customers, governments and their agencies
and the general public. The Framework describes the objective of financial statements as
the provision of information about the financial position, performance and changes in
financial position of an enterprise that is useful to a wide range of users in making
economic decisions. Hence, again a broad interpretation could include aspects of social
and environmental performance.

ISBN : 978-93-5254-333-5
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National Seminar on IND-AS : A Road Map for IFRS in India
VVPGC March 18 & 19,2016

1.4 Reporting Practices

The main goal of effective sustainability reporting is to manage economic, social, and
environmental issues in order to create long-term value for the business and its
stakeholders. Leaders in corporate responsibility (CR) invest in environmental and social
reporting as a catalyst to drive improvement and change, with the power to deliver far
more than an exercise in compliance or public relations. Effective sustainability reporting
provides insight into complex issues, supports strategic objectives, and contributes to
business success. Effective sustainability reporting requires both formal and informal
internal mechanisms to create awareness of the companys environmental objectives,
and validation of those objectives with a cascading set of performance measures. To build
consistency, credibility, and transparency into sustainability and climate change
measures, leading companies adopt internationally recognized frameworks. Uniform
standards help reduce the costs of conducting assessments by providing a consistent
methodology and straight forward criteria to guide a holistic, strategic approach to
tracking and reporting on nonfinancial measures. An essential tool for driving
performance improvement, common frameworks and standards increase comparability
to support internal and external benchmarking on nonfinancial reporting measures. Such
guidelines, help companies disclose consistent, straightforward data that they can
compare against the performance of industry peers and other organizations. Since
sustainability reporting is far less defined and regulated than financial reporting,
companies face tradeoffs and uncertainty when deciding exactly what to report internally
and externally, and where to draw the line.

Companies that apply best practices consider such reporting as a value creating
opportunity in which the organisation achieves financial goals derived from
environmentally responsible products and practices. Effective sustainability reporting
requires both formal and informal internal mechanisms to create awareness of the
companys environmental objectives, and validation of those objectives with a cascading
set of performance measures.

The Global Reporting Initiative (GRI) offers universal guidelines for sustainability
reporting. Such guidelines, help companies disclose consistent, straightforward data that
they can compare against the performance of industry peers and other organizations. By
changing the corporate mind-set toward environmental and social reporting from
compliance obligation to business opportunity, companies that apply best practices can
gain sustainable cost reduction, new revenue streams, and stronger stakeholder relations.
Since sustainability reporting is far less defined and regulated than financial reporting,
companies face tradeoffs and uncertainty when deciding exactly what to report internally
and externally, and where to draw the line. At the same time, the list of stakeholder

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National Seminar on IND-AS : A Road Map for IFRS in India
VVPGC March 18 & 19,2016

concerns keeps getting longer. Sustainability leaders meet these challenges by analyzing
performance gaps, benchmarking, and establishing systematic stakeholder engagement
and materiality analysis processes to identify the measures that matter most.

One way of making sure that the sustainability report fully addresses the stakeholder
concerns is to base the report on the companys Corporate Social Responsibility Strategy,
its different pillars and the corresponding action plans for each pillar. Through this
process there is consistency between strategy, actions and performance measurement
and companies are able to focus resources on the most important issues for tracking,
reporting, and improvement initiatives.

With the Companies Act, 2013 being passed, Companies are mandated to invest certain
part of their profits beyond business, for the larger good of society. Corporate Social
Responsibility (CSR) is a concept whereby companies integrate social, environmental and
health concerns in their business strategy (policy) and operations and in their interactions
with stakeholders on a voluntary basis. The social responsibility of business encompasses
the economic, legal, ethical, and discretionary expectations that society has, of
organizations, at a given point in time.

1.5 Accounting Challenges in the present Companies Act 2013

2% is calculated on the average profits of the preceding three years profits.


Profits are calculated in accordance with the provisions of Sec 198.
Expenditure made on the Corporate Social Responsibility activities is to be
recognised as allowable expenditure.
The expenses made are exempted under the Income Tax.

1.6 Implementation Benefits

By implementing social reporting standard, companies can potentially gain:

A more efficient and effective sustainability performance assessment process

More objective, consistent, and verifiable results from performance assessments

Higher performance on sustainability issues

Better reputation for sustainability reporting transparency

More accurate and reliable information to support decision making

1.7 Conclusion

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National Seminar on IND-AS : A Road Map for IFRS in India
VVPGC March 18 & 19,2016

As IASBs clear commitment to IFRSs will help for reaching the global standards. It is also a
high time that the IASB should think of promulgating a standard that specifically deals
with accounting specifications for Corporate spending on social activities including
environment aspects.

No doubt there is a need for institutional building in any country for more standard
setting capabilities. Either the regulation with regard to accounting for CSR spending
should be framed according to local issues or the IASB should be highly responsible just
like it solved accounting for bearer plants and residential construction in Asian region.

Many academics favour mandatory standards or legislated reporting requirements, and


various arguments are presented, predominantly focused on the protection of
stakeholders interests

Since India is moving towards the process of IFRS convergence, the issue of the CSR
accounting can be taken up in a structured manner.

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National Seminar on IND-AS : A Road Map for IFRS in India
VVPGC March 18 & 19,2016

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