Context: The Ministry of Corporate Affairs has expanded the turnover and borrowing thresholds for Small and Medium-sized Companies (SMC), allowing a larger number of firms to benefit from reporting exemptions under accounting norms.
Key changes

• The MCA has increased the turnover threshold for SMCs to Rs 250 crore from Rs 50 crore, and the borrowing threshold to Rs 50 crore from Rs 10 crore.
• SMCs are permitted to avail a number of exemptions under the Company (Accounting Standards) Rule 2021 to reduce the complexity of regulatory filings for smaller firms.
• Banks, financial institutions, insurance companies, and listed companies cannot be classified as SMCs.
• Further, any company which is either the holding company or subsidiary of a company that is not an SMC cannot be classified as an SMC.

What are the exemptions available to SMCs that are not available to other firms?

• SMC are completely exempted from having to file cash flow statements and provide a segmental break up of their financial performance in mandatory filings.
• SMCs can also avail partial reporting exemptions in areas including reporting on employee benefits obligations such as pensions.
• SMCs are exempted from having to provide a detailed analysis of benefit obligations to employees, but are still required to provide actuarial assumptions used in valuing the company’s obligations to employees.
• SMCs are also exempted from having to report diluted earnings per share in their filings.
• Diluted earnings per share reflect the per-share earnings of a company assuming that all options to convert other securities into shares are exercised.

Key impact

• Experts have noted that the move would promote ease of doing business for the firms that would now be included under the definition of SMC.
• The Accounting Standards for SMC, which were notified in December 2006 and amended from time to time, are much simpler as compared to Indian Accounting Standards (Ind AS).
• These accounting standards involve less complexity in their application, including the number of required disclosures being less onerous.
• Ind AS standards are applied to larger firms and are largely similar to International Financial Reporting Standards (IFRS) used in most developed jurisdictions.