Skip to content

Advanced Accounting · Applicability of Accounting Standards

Classification of Companies: Level I, II and III Entities

Updated 4 October 2026 · Fact-checked

Level I, II and III classify non-company entities for Accounting Standards applicability, using listing, nature of business, turnover, borrowings and group links. Level I is the largest, Level III the smallest. Companies are split into SMC and non-SMC under the Companies Rules. Test Level I first, then Level II; everything else is Level III.

Understand Classification of Companies: Level I, II and III Entities

Accounting Standards are not applied the same way to every entity. A small shop-like business should not carry the same disclosure burden as a listed giant. So the rules sort entities by size and public interest, and smaller ones get exemptions or relaxations.

For companies, the Companies (Accounting Standards) Rules divide them into Small and Medium Sized Companies (SMC) and non-SMC. For non-company entities (firms, trusts, societies, individuals in business and so on), ICAI uses three levels: Level I, Level II and Level III. These are two separate classifications. Your exam may use either wording, so know both. Answer under the classification that matches the entity type: SMC / non-SMC for a company, and Level I / II / III for a non-company entity.

Both classifications draw on a few similar facts: is the entity listed or in the process of listing, is it a bank, financial institution or insurer, what was its turnover (excluding other income) in the immediately preceding accounting year, what were its borrowings (including public deposits) at any time during that year, and is it a holding or subsidiary of an entity in a higher class.

Under the Companies Rules, a company is an SMC only if it is not listed or in the process of listing, is not a bank, financial institution or insurer, has turnover not exceeding ₹250 crore, has borrowings not exceeding ₹50 crore, and is not a holding or subsidiary of a non-SMC. The SMC definition has only two outcomes, SMC and non-SMC. It has no middle tier like Level II.

For non-company entities, ICAI's Level I applies if turnover exceeds ₹250 crore or borrowings exceed ₹50 crore (or another Level I trigger applies). Level II adds a middle band, with turnover above ₹50 crore up to ₹250 crore, or borrowings above ₹10 crore up to ₹50 crore. Level III is the smallest class: turnover not exceeding ₹50 crore and borrowings not exceeding ₹10 crore, with no Level I or Level II trigger.

Level I entities must comply fully with all the Accounting Standards. Level II and Level III entities get relaxations, with Level III getting the most. The detail of those relaxations is a separate topic. Here, your job is only to put the entity in the right box.

The thresholds use the word exceeds (or, for SMC, not exceeding). An entity at exactly the limit does not exceed it. Always check this when the figures in a question are round numbers. Also confirm the limits against the ICAI study material for your sitting, since limits have been revised over time.

Key rules to remember

Level I (non-company entity)
Listed or in process of listing (in India or outside India), OR bank / financial institution / insurer, OR turnover > ₹250 crore, OR borrowings > ₹50 crore, OR holding / subsidiary of a Level I entity
Any one condition is enough. Turnover excludes other income. Borrowings include public deposits and are tested at any time during the immediately preceding accounting year. The group-link test here is only about Level I. It is not the SMC group test.
Level II (non-company entity)
Not Level I, and any one of: turnover > ₹50 crore up to ₹250 crore, OR borrowings > ₹10 crore up to ₹50 crore, OR holding / subsidiary of a Level II entity
Check Level I first. Level II applies only to entities that fail every Level I test, and then any one Level II trigger is enough. A holding or subsidiary of a Level II entity is itself Level II.
Level III (non-company entity)
Neither Level I nor Level II: turnover ≤ ₹50 crore and borrowings ≤ ₹10 crore, with no listing, nature-of-business or group-link trigger for Level I or II
Level III is the residual class. You prove it by ruling out the other two. It gets the most relaxations.
Small and Medium Sized Company (SMC)
Not listed or in process of listing (in India or outside India), not a bank / financial institution / insurer, turnover ≤ ₹250 crore, borrowings ≤ ₹50 crore, and not a holding or subsidiary of a non-SMC
A company that fails any one of these conditions is a non-SMC. Turnover excludes other income. SMC is a separate classification from Level I, II and III, with its own group-link test: not a holding or subsidiary of a non-SMC. It has no Level II-type middle tier.

How to solve Classification of Companies: Level I, II and III Entities questions

First decide which classification the question needs. Then test the highest class first and move down only when the entity fails every test.

  1. 1Identify the entity type: company or non-company. This tells you whether the answer is SMC / non-SMC (Companies Rules) or Level I / II / III (ICAI levels). Do not mix the two tests.
  2. 2Check listing: is any equity or debt security listed, or in the process of listing, in India or outside India? If yes, a non-company entity is Level I and a company is non-SMC.
  3. 3Check nature of business: a bank, co-operative bank, financial institution or insurer is Level I if it is a non-company entity, and non-SMC if it is a company.
  4. 4Check turnover (excluding other income) and borrowings (including public deposits, at any time during the preceding year). For a non-company entity, test them against the Level I limits of ₹250 crore and ₹50 crore. For a company, test them against the SMC limits of ₹250 crore (turnover) and ₹50 crore (borrowings). If either is exceeded, a non-company entity is Level I and a company is non-SMC.
  5. 5Check group links separately for each classification. For a non-company entity, a holding or subsidiary of a Level I entity is Level I. For a company, a holding or subsidiary of a non-SMC is non-SMC. Do not use one of these group tests for the other classification.
  6. 6For a non-company entity that is not Level I, test Level II: turnover above ₹50 crore, or borrowings above ₹10 crore, or holding / subsidiary of a Level II entity. If none apply, it is Level III. For a company, there is no Level II step: if it passes every SMC condition it is an SMC, otherwise a non-SMC.
  7. 7Write the conclusion with the reason, and state the consequence (full compliance, or relaxations available).

Quickest way: Top-down elimination with a four-line checklist

When to use it: Use for MCQs and for short classification parts of written answers, where you have under two minutes.

  1. Scan the question for the words listed, bank, insurance, holding, subsidiary. Any of these usually decides the class immediately.
  2. For a non-company entity, compare turnover with 250 and 50, and borrowings with 50 and 10. For a company, compare turnover with 250 and borrowings with 50. Remember to ignore other income and to treat the limit as exceeded only if the figure is higher.
  3. In MCQs, eliminate options that give a lower class than the highest test the entity fails. The entity takes the highest class it qualifies for.
  4. In written answers, use three lines: Provision (the criteria), Facts (the entity's figures), Conclusion (the class and the consequence). This earns step marks even if the final class is debatable.

Common mistakes in Classification of Companies: Level I, II and III Entities

  • Including other income in turnover

    Students take the total income figure from the question without reading the definition.

    Fix: Use turnover from operations only. Exclude other income such as interest on investments, rent or profit on sale of assets.

  • Treating an entity exactly at the limit as the higher class

    Students read ₹250 crore as the boundary of Level I instead of reading 'exceeds'.

    Fix: Level I needs turnover or borrowings above the limit. At exactly ₹250 crore turnover, with no other trigger, the entity is not Level I on that test.

  • Requiring all conditions instead of any one

    The criteria look like a list, so students think they must all hold.

    Fix: For Level I, any single trigger is enough. For Level III or SMC, the entity must fail every higher-class trigger.

  • Ignoring the holding or subsidiary link

    Students focus on the entity's own turnover and borrowings.

    Fix: Always check group status. A small subsidiary of a Level I entity is Level I, and a small subsidiary of a non-SMC company is non-SMC.

  • Testing borrowings only at year end

    Balance sheet figures feel like the natural source.

    Fix: The test is borrowings at any time during the immediately preceding accounting year, including public deposits. A mid-year peak counts.

  • Mixing up Level terms and SMC terms

    Both appear in the chapter and students use them interchangeably.

    Fix: SMC / non-SMC applies to companies, and Level I, II, III applies to non-company entities. Answer a question under the classification that matches the entity type. They are separate classifications. SMC has no Level II-type middle tier, so do not look for one.

Worked examples

Example 1

A partnership firm, not listed and not a financial institution, had turnover from operations of ₹40 crore and other income of ₹15 crore in the preceding year. Its borrowings reached a peak of ₹12 crore during the year but were ₹7 crore at year end. It has no holding or subsidiary links. Classify the firm.

Show the solution
  1. Type: non-company entity, so use Level I, II or III.
  2. Level I tests: not listed, not a bank, financial institution or insurer. Turnover (excluding other income) is ₹40 crore, which does not exceed ₹250 crore. Peak borrowings are ₹12 crore, which do not exceed ₹50 crore. No group link. So it is not Level I.
  3. Level II tests (the firm is not Level I, so now any one trigger is enough): turnover of ₹40 crore does not exceed ₹50 crore, so the turnover test fails. Borrowings are tested at any time in the year, so the peak of ₹12 crore applies, not the year-end ₹7 crore. ₹12 crore exceeds ₹10 crore and does not exceed ₹50 crore, so the borrowings test is met.
  4. One Level II trigger is enough.

Answer: The firm is a Level II entity, because its borrowings at one point in the year exceeded ₹10 crore. It therefore gets the relaxations available to Level II entities.

Example 2

An unlisted company has turnover from operations of ₹180 crore and borrowings never above ₹8 crore in the preceding year. It is not a bank, financial institution or insurer. It is a subsidiary of a listed company. Is it a Small and Medium Sized Company?

Show the solution
  1. Type: company, so use SMC or non-SMC.
  2. Listing: the company itself is not listed, so this condition is met.
  3. Nature: not a bank, financial institution or insurer, so this condition is met.
  4. Turnover: ₹180 crore does not exceed ₹250 crore, so this condition is met.
  5. Borrowings: ₹8 crore does not exceed ₹50 crore, so this condition is met.
  6. Group link: an SMC must not be a holding or subsidiary of a non-SMC. The holding company is listed, so it is a non-SMC. This condition fails.
  7. Failing any one condition makes the company a non-SMC.

Answer: The company is not an SMC. It is a non-SMC because it is a subsidiary of a listed company, even though its own turnover and borrowings are within the SMC limits. It must comply fully with the Accounting Standards.

Exam tips

  • Write the criteria first, then the facts, then the conclusion. Examiners give marks for each step, not just the class.
  • Underline the words 'listed', 'subsidiary', 'holding', 'bank' and 'insurer' in the question. These are the traps that override the size figures.
  • In MCQs, the entity takes the highest class it qualifies for. Test Level I first.
  • For Levels, memorise the number pairs 250 / 50 and 50 / 10 with their direction: turnover then borrowings, and 'exceeds' for each. For SMC, remember 250 / 50: turnover not exceeding ₹250 crore and borrowings not exceeding ₹50 crore.
  • Link your answer to the consequence in one line. Say whether full compliance applies or relaxations are available.

Practice questions from Applicability of Accounting Standards

Classification of Companies: Level I, II and III Entities: frequently asked questions

What is the difference between Level I and Level II entities?

Level I entities are the largest or most publicly accountable: listed entities, banks, financial institutions, insurers, and those with turnover above ₹250 crore or borrowings above ₹50 crore. Level II entities are mid-sized, with turnover above ₹50 crore up to ₹250 crore or borrowings above ₹10 crore up to ₹50 crore. Level I must comply fully with Accounting Standards, while Level II gets some relaxations.

How do I classify an entity as Level I, II or III?

Test Level I first: listing, nature of business, turnover, borrowings and group links. If none applies, test Level II using the lower limits. If neither applies, the entity is Level III, which means turnover not exceeding ₹50 crore and borrowings not exceeding ₹10 crore. Always take the highest class it qualifies for.

Does turnover include other income?

No. Turnover for classification excludes other income. Use turnover from operations only, and do not add interest, dividend, rent or gains on sale of assets.

Do Level I, II and III apply to companies?

For companies, the Companies (Accounting Standards) Rules use the terms SMC and non-SMC. An SMC has turnover not exceeding ₹250 crore and borrowings not exceeding ₹50 crore, among other conditions. The three levels are ICAI's separate classification for non-company entities, and SMC status has no Level II-type middle tier, so you cannot use the same test for both. Identify whether the entity is a company or not, then apply the matching classification.