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Classification Criteria for Non-Company Entities FAQs
What is the new classification for non-company entities in accounting standards?
The ICAI classifies non-company entities into two categories: MSMEs and Large Entities, to determine their compliance level with Accounting Standards.
Who qualifies as a Micro, Small, and Medium-Sized Entity (MSME)?
An MSME is a non-company entity with unlisted securities, a turnover below INR 250 crore, borrowings below INR 50 crore, and is not a bank, financial institution, or insurance company.
What are the compliance requirements for Large Entities under the revised classification?
Large Entities must comply fully with all Accounting Standards as per ICAI’s revised guidelines without exemptions or relaxations.
How does ICAI’s revised classification benefit MSMEs?
The revised classification offers MSMEs compliance exemptions and relaxed requirements, making financial reporting manageable while maintaining transparency.
ICAI Revises Classification Criteria for Non-Company Entities in Accounting Standards
ICAI announced revised classification criteria for non-company entities in accounting standards, covering MSMEs, large entities, and new compliance requirements effective from April 1, 2024.
Mridula Sharma8 Nov, 2024
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The Institute of Chartered Accountants of India (ICAI) recently introduced a significant update to the Classification Criteria for Non-Company Entities in its Accounting Standards framework. This revised classification, approved during the ICAI Council's 433rd meeting held on August 13-15, 2024, brings new requirements for different non-company entities, aiming to provide more relevant and structured accounting guidance.
These new criteria will take effect for accounting periods commencing on or after April 1, 2024. This change underscores ICAI's commitment to improving financial transparency and standardization in India’s accounting landscape.
Let’s dive into the key updates and check what this means for Micro, Small, and Medium-sized Entities (MSMEs) and Large Entities, along with the implications for CA students and professionals.
Classification Criteria for Non-Company Entities
The new Classification Criteria for Non-Company Entities categorizes entities into two main groups based on their size, structure, and financial activities:
Micro, Small, and Medium-Sized Entities (MSMEs)
Large Entities
This classification is designed to determine the extent of compliance required by each category with Accounting Standards. The revised scheme replaces the previous announcement from March 2021, ensuring that each entity type follows standards suitable to its complexity and scale of operations.
Classification of Micro, Small, and Medium-Sized Entities (MSMEs)
Micro, Small, and Medium-Sized Entities (MSMEs) refer to non-company entities that meet specific criteria. Under the updated Classification Criteria for Non-Company Entities, an MSME must meet the following conditions:
Unlisted Securities
: The entity's equity or debt securities must not be listed or be in the process of listing on any stock exchange, whether domestic or international.
Exclusion of Banks and Insurance Companies
: The entity should not be a bank, financial institution, or insurance company.
Turnover Limit
: The entity’s turnover, excluding other income, must not exceed INR 250 crore in the preceding accounting year.
Borrowing Limit
: The entity must not have borrowings exceeding INR 50 crore at any point during the preceding accounting year.
Independence from Larger Entities
: The entity should not be a subsidiary or holding of a non-MSME entity.
Entities that fulfill these criteria by the end of the relevant accounting period are considered MSMEs and qualify for certain exemptions and relaxations in Accounting Standards.
Large Entities in the Revised Classification Criteria
In contrast, Large Entities are non-company entities that do not qualify as MSMEs under the revised Classification Criteria for Non-Company Entities. These entities are typically larger and more complex in their financial activities and structures. Therefore, they are required to comply fully with all applicable Accounting Standards without the exemptions provided to MSMEs.
ICAI’s emphasis on stricter compliance for Large Entities ensures that they maintain higher transparency and accountability in their financial reporting, which is essential for investors and stakeholders.
Key Changes of Revised Classification Criteria for Non-Company Entities
The ICAI’s updated Classification Criteria for Non-Company Entities not only adjusts the categorization but also mandates the way these entities report and disclose their compliance with Accounting Standards:
Terminology Updates
: The terms "Small and Medium Enterprise (SME)" are now replaced with "Micro, Small, and Medium-Sized Entity (MSME)." Similarly, Level I to IV designations are updated, where Level II, III, and IV entities are now grouped as MSMEs, and Level I entities as Large Entities.
Compliance Requirements
: Large Entities must follow all Accounting Standards rigorously, whereas MSMEs receive certain exemptions and relaxations tailored to their operational scale and financial simplicity.
Disclosure Obligations for MSMEs
: MSMEs that choose to avail of exemptions must disclose this in their financial statements. If an entity loses its MSME status, it must disclose the changes accordingly without revising past period figures, offering transparency to stakeholders.
Adaptability for Transitioning MSMEs
: Entities that transition between classifications will follow specific compliance guidelines to ensure accurate financial disclosures over consecutive periods, reflecting ICAI’s forward-thinking approach.
These changes aim to simplify accounting obligations for smaller entities while ensuring that larger entities adhere to comprehensive financial reporting standards.
Importance of the Revised Classification Criteria for CA Students
For CA students, understanding the Classification Criteria for Non-Company Entities is crucial. It enhances their knowledge of accounting standards applicable to diverse non-company entities, preparing them for real-world applications. This update is a valuable learning tool, helping students comprehend the dynamics between entity size and compliance requirements.
Moreover, it reinforces the principles of proportionality and relevance in accounting—a fundamental concept that students need to master for effective financial reporting.
Practical Implications of the Revised Classification for MSMEs
The updated Classification Criteria for Non-Company Entities presents several practical implications for MSMEs, especially with regard to financial disclosures and standard applicability:
Flexible Compliance
: MSMEs have the option to avail of certain exemptions, making compliance more manageable for smaller entities without compromising reporting quality.
Gradual Compliance Shift
: When an MSME transitions to a Large Entity, it is given a reasonable adjustment period, allowing time for adaptation to the full range of Accounting Standards.
Disclosure Requirements
: MSMEs must disclose their status and whether they have availed of exemptions, thus ensuring transparency and adherence to ethical financial practices.
These measures reflect ICAI’s understanding of MSMEs’ unique financial capacities, promoting a balanced approach to standard implementation.
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