MSMEs play a very important role in the Indian economy. Recognising that small and medium entities may find it difficult to comply with every detailed accounting requirement, the Institute of Chartered Accountants of India (ICAI) has provided specific exemptions and relaxations knowing this.
These exemptions reduce compliance burden without compromising basic financial discipline.
In this blog, we will explain MSME exemptions under Accounting Standards, standard by standard, in a clear and exam-oriented way.
Why MSME Exemptions Are Provided
MSMEs generally:
- Have limited resources
- Do not engage in complex transactions
- Do not have public accountability like large entities
Therefore, ICAI allows MSMEs to:
- Skip certain Accounting Standards entirely
- Ignore some disclosure requirements
- Use simplified measurement methods
Types of MSME Exemptions
MSME exemptions fall into three broad categories:
- Accounting Standards not applicable at all
- Accounting Standards not applicable in entirety (conditional)
- Accounting Standards applicable with relaxations
Let us now understand each category clearly.
Accounting Standards NOT Applicable to MSMEs
The following Accounting Standards are not applicable in their entirety to MSMEs:
AS 3 – Cash Flow Statements
MSMEs are not required to prepare a Cash Flow Statement.
AS 17 – Segment Reporting
MSMEs do not need to report information about different business or geographical segments.
AS 20 – Earnings Per Share
MSMEs are not required to calculate or disclose EPS.
AS 24 – Discontinuing Operations
MSMEs need not separately disclose discontinuing operations.
Accounting Standards NOT Applicable to Certain MSMEs (Conditional)
AS 18 – Related Party Disclosures
AS 28 – Impairment of Assets
These two standards are not applicable in their entirety to MSMEs that satisfy all three conditions:
- Turnover ≤ ₹50 crore
- Borrowings ≤ ₹10 crore
- Not a holding or subsidiary of another entity
If these conditions are not met, the standard becomes applicable with relaxations.
Accounting Standards Applicable with Relaxations
Now let us understand the most important AS-wise exemptions, which are frequently asked in exams.
AS 10 – Property, Plant and Equipment
MSMEs:
- May ignore encouraged disclosure requirements
- Basic recognition and depreciation must still be followed
AS 11 – Effects of Changes in Foreign Exchange Rates
MSMEs:
- May skip encouraged disclosures
- Core recognition and measurement rules still apply
AS 15 – Employee Benefits
This is a very important exam area.
MSMEs are exempted from:
- Complex actuarial valuation
- Discounting of long-term liabilities
- Detailed defined benefit plan disclosures
Instead, they may use simplified estimation methods.
AS 19 – Leases
MSMEs:
- Are exempted from many detailed disclosure requirements
- Must still follow basic lease classification and accounting
AS 22 – Accounting for Taxes on Income
MSMEs:
- Need to comply only with current tax
- Deferred tax accounting is optional with transitional adjustments
When first availing exemption:
- Deferred tax balance is adjusted against opening reserves
AS 26 – Intangible Assets
MSMEs:
- Can skip certain disclosure requirements
- Must still recognise and amortise intangible assets
AS 28 – Impairment of Assets
MSMEs:
- May estimate “value in use” without present value techniques
- Can skip detailed discount rate disclosures
AS 29 – Provisions, Contingent Liabilities and Contingent Assets
MSMEs:
- Are exempted from certain disclosure paragraphs
- Recognition rules must still be followed
Special Standards – When They Apply
The following standards do not force MSMEs to prepare statements unless required by law:
- AS 21 – Consolidated Financial Statements
- AS 23 – Investments in Associates
- AS 27 – Joint Ventures (consolidation part)
- AS 25 – Interim Financial Reporting
They apply only if:
- The entity is legally required, or
- The entity voluntarily prepares such statements
Disclosure Requirements for MSMEs
When MSMEs avail exemptions, they must disclose:
- That the entity qualifies as an MSME
- That Accounting Standards applicable to MSMEs are complied with
- Details of exemptions or relaxations availed
Partial exemptions are allowed, but they must not mislead users.
Why This Blog Is Very Important for Exams
This topic is:
- Frequently tested in MCQs
- Popular in case-study questions
- Crucial for practical problems
Students often lose marks by:
- Forgetting conditional exemptions
- Confusing “not applicable” with “relaxation”
Quick Revision Tip
- Large Entity → No exemptions
- MSME → Exemptions allowed
- Small MSME → Extra relief under AS 18 & AS 28
What’s Next?
Now that you understand MSME exemptions AS-wise, the next topic is:
Applicability of Accounting Standards to Companies & SMCs
This will explain company-specific rules and SMC relaxations, completing the entire chapter.
FAQs
1. Why are MSMEs given exemptions under Accounting Standards?
MSMEs are given exemptions to reduce compliance burden since they usually have limited resources and simpler business operations.
2. Which Accounting Standards are not applicable to MSMEs?
AS 3 (Cash Flow Statements), AS 17 (Segment Reporting), AS 20 (Earnings Per Share) and AS 24 (Discontinuing Operations) are not applicable to MSMEs.
3. Are AS 18 and AS 28 applicable to all MSMEs?
No. AS 18 and AS 28 are not applicable in entirety to MSMEs whose turnover does not exceed ₹50 crore and borrowings do not exceed ₹10 crore.
4. What exemptions are available under AS 15 for MSMEs?
MSMEs are exempted from actuarial valuation, discounting of long-term liabilities and detailed disclosures related to defined benefit plans.
5. Is Cash Flow Statement mandatory for MSMEs?
No. MSMEs are not required to prepare a Cash Flow Statement under AS 3.
6. Can MSMEs partially avail exemptions under Accounting Standards?
Yes. MSMEs can choose exemptions for some standards and comply fully with others, but must disclose the same clearly.
7. Do MSMEs need to disclose exemptions availed?
Yes. MSMEs must disclose their MSME status and details of exemptions or relaxations availed in the notes to accounts.
