Applicability of Accounting Standards to Non-Corporate Entities

Introduction

Accounting Standards (AS) plays a vital role in ensuring comparability, consistency and transparency in preparation and presentation of Financial Statements.

Accounting Standards applicable to companies have already been issues by the Institute of Chartered Accountants of India (ICAI) as notified by the Companies Act. Now, the ICAI has laid down a classification framework for non-corporate entities to determine which standards apply to them and to what extent.

In this blog post we will see the classification, applicability, and key exemptions of Accounting Standards for non-corporate entities.

What are Non-Corporate Entities?

Non-Corporate Entities are all Business or Professional Entities, other than Companies incorporated under Companies Act and Limited Liability Partnerships incorporated under Limited Liability Partnership Act.

The following can be classified as Non-Corporate Entities:

1. Sole proprietorship firms
2. Hindu Undivided Family
3. Partnership firms
   • Registered Partnership Firms
   • UnRegistered Partnership Firms
4. Association of Persons (AOPs)
   • Partnership firms not covered above
   • Body of Individuals
   • Resident welfare Association
5. Society registered under any law for the time being in force
6. Trust (private or public) registered or unregistered under any law for the time being in force.
7. Statutory Corporations, Autonomous bodies and Authorities
8. Any form of organisation that is engaged fully or partially in any Business or Professional activities.

Classification of Non-Corporate Entities

For the purpose of applicability of the accounting standards, non-corporate entities have been classified into four categories i.e Level I, Level II, Level III and Level IV.

Level	Criteria for Classification	Turnover (Excl. Other Income)	Borrowings (Incl. Public Deposits)	Other Conditions
Level I	♦ Listed or in process of listing on any stock exchange (India or abroad) ♦ Engaged in financial/insurance activities	> ₹250 crore	> ₹50 crore	Includes holding or subsidiary of such entities
Level II	Not Level I	> ₹50 crore to ₹250 crore	> ₹10 crore to ₹50 crore	Includes holding or subsidiary of such entities
Level III	Not Level I or II	> ₹10 crore to ₹50 crore	> ₹2 crore to ₹10 crore	Includes holding or subsidiary of such entities
Level IV	Not covered under Level I, II or III	≤ ₹10 crore	≤ ₹2 crore	Smallest category with maximum exemptions

Applicable Accounting Standards to Non-Corporate Entities

The Accounting Standards issued by the ICAI, as on April 1, 2020, and such standards as issued from time-to-time are applicable to Non-company entities subject to the relaxations and exemptions.

The Accounting Standards issued by ICAI as on April 1, 2020 are as follows:

AS 1	Disclosure of Accounting Policies
AS 2	Valuation of Inventories
AS 3	Cash Flow Statements
AS 4	Contingencies and Events Occurring After the Balance Sheet Date
AS 5	Net Profit or Loss for the Period, Prior Period Items and
AS 7	Construction Contracts
AS 9	Revenue Recognition
AS 10	Property, Plant and Equipment
AS 11	The Effects of Changes in Foreign Exchange Rates
AS 12	Accounting for Government Grants
AS 13	Accounting for Investments
AS 14	Accounting for Amalgamations
AS 15	Employee Benefits
AS 16	Borrowing Costs
AS 17	Segment Reporting
AS 18	Related Party Disclosures
AS 19	Leases
AS 20	Earnings Per Share
AS 21	Consolidated Financial Statements
AS 22	Accounting for Taxes on Income
AS 23	Accounting for Investments in Associates in Consolidated Financial Statements
AS 24	Discontinuing Operations
AS 25	Interim Financial Reporting
AS 26	Intangible Assets
AS 27	Financial Reporting of Interests in Joint Ventures
AS 28	Impairment of Assets
AS 29	Provisions, Contingent Liabilities and Contingent Assets

Applicability of the Accounting Standards to Level I Entities

Level I Entities are required to follow all the above mentioned accounting standards.

Applicability of the Accounting Standards to Level II/Level III/Level IV Entities

AS	Level II Entities	Level III Entities	Level IV Entities
AS 1	Applicable	Applicable	Applicable
AS 2	Applicable	Applicable	Applicable
AS 3	Not Applicable	Not Applicable	Not Applicable
AS 4	Applicable	Applicable	Applicable
AS 5	Applicable	Applicable	Applicable
AS 7	Applicable	Applicable	Applicable
AS 9	Applicable	Applicable	Applicable
AS 10	Applicable	Applicable with disclosures exemption	Applicable with disclosures exemption
AS 11	Applicable	Applicable with disclosures exemption	Applicable with disclosures exemption
AS 12	Applicable	Applicable	Applicable
AS 13	Applicable	Applicable	Applicable
AS 14	Applicable	Applicable	Not Applicable (Refer note 2(C))
AS 15	Applicable with exemptions	Applicable with exemptions	Applicable with exemptions
AS 16	Applicable	Applicable	Applicable
AS 17	Not Applicable	Not Applicable	Not Applicable
AS 18	Applicable	Not Applicable	Not Applicable
AS 19	Applicable with disclosures exemption	Applicable with disclosures exemption	Applicable with disclosures exemption
AS 20	Not Applicable	Not Applicable	Not Applicable
AS 21	Not Applicable (Refer note 2(D))	Not Applicable (Refer note 2(D))	Not Applicable (Refer note 2(D))
AS 22	Applicable	Applicable	Applicable only for current tax related provisions (Refer note 2(B)(vi))
AS 23	Not Applicable (Refer note 2(D))	Not Applicable (Refer note 2(D))	Not Applicable (Refer note 2(D))
AS 24	Applicable	Not Applicable	Not Applicable
AS 25	Not Applicable (Refer note 2(D))	Not Applicable (Refer note 2(D))	Not Applicable (Refer note 2(D))
AS 26	Applicable	Applicable	Applicable with disclosures exemption
AS 27	Not Applicable (Refer notes 2(C) and 2(D))	Not Applicable (Refer notes 2(C) and 2(D))	Not Applicable (Refer notes 2(C) and 2(D))
AS 28	Applicable with disclosures exemption	Applicable with disclosures exemption	Not Applicable
AS 29	Applicable with disclosures exemption	Applicable with disclosures exemption	Applicable with disclosures exemption

Accounting Standards in respect of which relaxations/exemptions from certain requirements have been given to Level II, Level III and Level IV Non-company entities:

To ease the compliance burden on smaller non-corporate entities ICAI provides certain relaxations and exemptions in accounting standards for Level II to IV entities. These mostly relate to disclosures, complex measurements, and presentation requirements. We shall in detail the relaxations / exemptions which are available:

✅ AS 10 – Property, Plant & Equipment – Level III & IV: Encouraged disclosures under paragraph 87 are not mandatory.

Paragraph 87 under AS 10 is reproduced as follows:

87 An enterprise is encouraged to disclose the following:

• (a) the carrying amount of temporarily idle property, plant and equipment;
• (b) the gross carrying amount of any fully depreciated property, plant and equipment that is still in use;
• (c) for each revalued class of property, plant and equipment, the carrying amount that would have been recognised had the assets been carried under the cost model;
• (d) the carrying amount of property, plant and equipment retired from active use and not held for disposal.

✅ AS 11 – The Effects of Changes in Foreign Exchange Rates – Level III & IV: Encouraged disclosures under paragraph 44 are not mandatory.

Paragraph 44 under AS 11 is reproduced as follows:

Disclosure is also encouraged of an enterprise’s foreign currency risk management policy.

✅ AS 15 – Employee Benefits – Relaxation is based on number of employees:

Area	Paragraph Numbers	Applicability / Notes
Short-term accumulating compensated absences (non-vesting)	Paras 11 to 16 (relevant portion)	Exempt for Level II, III (if < 50 employees), and Level IV regardless of employee count
Discounting of benefits payable after 12 months	Paras 46 and 139	Exempt for Level II, III (< 50 employees), and Level IV
Defined Benefit Plans – Recognition & Measurement	Paras 50 to 116	Exempt for Level II & III (< 50 employees) and Level IV. Simplified method allowed
Defined Benefit Plans – Presentation & Disclosure	Paras 117 to 123	Same as above – relaxed for Level II/III (< 50 employees) and Level IV
Defined Benefit Plans – Actuarial Assumptions (still applicable)	Para 78 & Para 120(l)	Still required if actuarial method is followed (Level II & III with ≥ 50 employees)
Other Long-term Employee Benefits – Recognition & Measurement	Paras 129 to 131	Exempt for Level II/III (< 50 employees) and Level IV; simplified estimation permitted

✅ AS 19 – Leases

• Level II: Exempt from some disclosure clauses such as Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a) and (f); and 46 (b) and (d)
• Level III: More disclosure exemptions than Level II. Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a), (f) and (g); and 46 (b), (d) and (e) relating to disclosures are not applicable to Level III Non-company entities.
• Level IV: Most detailed lease disclosures are not required. Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a), (f) and (g); 38; and 46 (b), (d) and (e) relating to disclosures are not applicable

Paragraph No.	Disclosure Requirement
22(c)	Reconciliation between total minimum lease payments and present value (lessee – finance lease)
22(e)	Contingent rent expense (lessee – finance lease)
22(f)	Future minimum sublease payments receivable (lessee – finance lease)
25(a)	Future minimum lease payments – time-wise breakup (lessee – operating lease)
25(b)	Contingent rent expense (lessee – operating lease)
25(e)	Future minimum sublease payments receivable (lessee – operating lease)
37(a)	Reconciliation of gross investment and present value (lessor – finance lease)
37(f)	Unguaranteed residual values (lessor – finance lease)
37(g)	Unearned finance income (lessor – finance lease)
38	Selling profit/loss at inception (manufacturer/dealer lessor)
46(b)	Significant leasing arrangements (all leases)
46(d)	Accounting policies for leases
46(e)	Basis of contingent rent determination

✅ AS 22 – Taxes on Income

• Level IV: Only current tax needs to be accounted; deferred tax is not required.
• On first-time classification as Level IV, existing deferred tax assets/liabilities can be adjusted against reserves.

✅ AS 26 – Intangible Assets – Level IV Entities are exempt from certain disclosures like breakdown of R&D costs, amortization methods.

✅ AS 28 – Impairment of Assets

• Level II & III: Can estimate value in use without present value technique (i.e., no need for discount rate, future cash flow projections).
• Level III: Exempt from many impairment-related disclosures (e.g., recoverable amount, impairment reversal details).

✅ AS 29 – Provisions & Contingent Liabilities – Level II, III & IV are exempt from detailed reconciliation disclosures (e.g., movement in provisions).

Standards Not Applicable to Level IV (Unless specifically required)

AS	Standard
AS 14	Accounting for Amalgamations
AS 27	Financial Reporting of Interests in Joint Ventures
AS 21	Consolidated Financial Statements
AS 23	Accounting for Investments in Associates in Consolidated Financial Statements
AS 25	Interim Financial Reporting

Simplified Guidelines on applying Accounting Standards for SMCs

A. General Instructions

♦ Mandatory Disclosure by SMCs

A company is a SMC in the previous year and has availed the exemptions/relaxations, a note must be given in the Financial Statements stating:

“The Company is a Small and Medium Sized Company (SMC) as defined in the Companies (Accounting Standards) Rules, 2021 notified under the Companies Act, 2013. Accordingly, the Company has complied with the Accounting Standards as applicable to a Small and Medium Sized Company.”

♦ Not Being a SMC in a year

• The Entity should follow the full Accounting Standard from the current year.
• Need not revise the financial statements of the previous year.
• Mention in the notes the entity was a SMC in the previous year and had availed the benefits.

♦ Partial Use of Exemptions – If the entity uses exemptions only for some Accounting Standards, it should clearly mention for which specific standards the exemptions were availed for.

♦ Voluntary Disclosures – If the entity wants to disclose any information voluntarily (even though not required for SMCs), it can do so, but it must be as per the full Accounting Standards.

♦ The entity cannot use exemptions or partial disclosures in a way that misleads the public or users of the Financial Statements.

B. Special Rule for Newly Classified SMCs

Rule 5 of the Companies (Accounting Standards) Rules, 2021:

"5. Qualification for exemption or relaxation in respect of SMC. - An existing company, which was previously not a Small and Medium Sized Company (SMC) and subsequently becomes a SMC, shall not be qualified for exemption or relaxation in respect of Accounting Standards available to a SMC until the company remains a SMC for two consecutive accounting periods."

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