Understanding Accounting Standards for Small and Medium Companies in India: A 2025 Guide

Introduction

Small and Medium Companies (SMCs) form the backbone of India’s economy, and ensuring their financial reporting aligns with regulatory standards is crucial for transparency and growth. The Companies (Accounting Standards) Rules, 2021, notified under the Companies Act, 2013, outline specific Accounting Standards (AS) that SMCs must follow, along with tailored exemptions to ease compliance. This 2025 guide simplifies these standards for Chartered Accountants (CAs), tax students, and business owners, offering actionable insights into applicability, relaxations, and best practices.

Accounting Standards for SMCs

What is a Small and Medium Company (SMC)?

As per Clause 2(e) of the Companies (Accounting Standards) Rules, 2021, an SMC is a company that meets all of these criteria:

• Its equity or debt securities are not listed (or in the process of listing) on any stock exchange.
• It is not a bank, financial institution, or insurance company.
• Its turnover (excluding other income) in the previous year does not exceed ₹250 crore.
• Its borrowings (including public deposits) do not exceed ₹50 crore at any point in the previous year.
• It is not a holding or subsidiary of a non-SMC.

Companies not meeting these criteria are classified as Non-SMCs and face stricter compliance requirements.

Which Accounting Standards Apply to SMCs?

The ICAI and MCA have categorized Accounting Standards into those applicable in full and those offering exemptions for SMCs. Here’s a breakdown based on the 2021 Rules:

Fully Applicable Accounting Standards

SMCs must comply with these standards in their entirety:

• AS 1: Disclosure of Accounting Policies
• AS 2: Valuation of Inventories (revised 2016)
• AS 5: Net Profit or Loss for the Period, Prior Period Items, and Changes in Accounting Policies
• AS 10: Property, Plant and Equipment
• AS 16: Borrowing Costs
• And more (full list includes AS 1-29, barring exemptions).

Standards with Exemptions or Relaxations

SMCs enjoy relaxations to reduce compliance burdens:

1. AS 15 – Employee Benefits:
   • No need to discount amounts due beyond 12 months (paragraphs 46, 139).
   • Simplified methods for defined benefit plans using the Projected Unit Credit Method, with disclosures limited to actuarial assumptions.
2. AS 19 – Leases: Exempt from specific disclosure requirements (e.g., paragraphs 22(c), 37(a)).
3. AS 20 – Earnings Per Share: Diluted EPS disclosure is not mandatory.
4. AS 28 – Impairment of Assets: Value-in-use can be estimated reasonably without the present value technique.
5. AS 17 – Segment Reporting: Not applicable in its entirety.

Key Exemptions for SMCs in 2025

The relaxations for SMCs are designed to balance compliance with practicality. For instance:

• AS 17 (Segment Reporting): SMCs don’t need to report segment-wise performance, unlike listed companies mandated by SEBI.
• AS 25 (Interim Financial Reporting): Only applies if the SMC voluntarily prepares interim reports—rare for small entities.
• Disclosure Notes: SMCs must include a note in their financial statements stating:
  “The Company is a Small and Medium Sized Company (SMC) as defined in the Companies (Accounting Standards) Rules, 2021. Accordingly, it has complied with the Accounting Standards as applicable to an SMC.”

These exemptions remain relevant in 2025, though companies should monitor MCA updates for potential changes (check www.mca.gov.in).

Transitioning Between SMC and Non-SMC Status

What happens if an SMC grows beyond the ₹250 crore turnover or ₹50 crore borrowing thresholds?

• From SMC to Non-SMC: Standards applicable to Non-SMCs kick in immediately, but prior-year figures need not be restated. A disclosure noting the transition is required.
• From Non-SMC to SMC: The company must remain an SMC for two consecutive years before availing exemptions (Rule 5, Companies (Accounting Standards) Rules, 2021).

This ensures stability in financial reporting while adapting to business growth.

Practical Tips for Compliance in 2025

1. Leverage Technology: Use accounting software like Tally or QuickBooks, aligned with AS requirements, to streamline reporting.
2. Stay Updated: Refer to ICAI’s Accounting Standards portal for clarifications and updates.
3. Consult Experts: CAs can guide SMCs on applying relaxations without risking non-compliance.
4. Document Exemptions: Clearly note which exemptions are availed in financial statements to avoid audits or penalties under the Companies Act.

Why It Matters for CAs and Students

For CA students, mastering AS applicability for SMCs is a practical skill tested in exams like CA Final (Paper 1: Financial Reporting). For practicing CAs, it’s a chance to advise small businesses effectively, ensuring they meet MCA standards without overburdening resources. In 2025, with India’s SME sector growing, this knowledge is more valuable than ever.

Conclusion

Understanding Accounting Standards for SMCs in India is essential for maintaining compliance while leveraging exemptions to support small business growth. Whether you’re a CA professional ensuring accurate audits or a student preparing for exams, this 2025 guide offers a clear roadmap. Stay compliant, stay informed, and help India’s SMEs thrive!

Ready to dive deeper? Explore the full text of the Companies (Accounting Standards) Rules, 2021, on the MCA website or join ICAI webinars for the latest insights.