ICAI and its members

(i) Case of RA
(Reported in Disciplinary Cases Vol-II – Part II published by ICAI – P.39)

The CIT (DR) made a complaint against the member that the company of which he was the Auditor had not made provision of wealth tax payable by the company. According to the complainant, the vacant land belonging to the company was valued by the valuer at Rs. 111 crore and the wealth tax liability worked out to a figure which was more than the net profit disclosed in the accounts. The auditor had not qualified the Audit Report on this issue.

The defence of the member was that the valuation report was neither obtained by him or by the company. It was obtained by a sister concern of the company and the member was not aware of the same when he gave the Audit Report. The book value of the land was only Rs. 11.74 lakh and the valuer had valued the land at Rs. 111 crore without giving any basis. Further, the member had relied on the management representation to the effect that the land was subject to numerous litigations and there were restrictions for construction. Therefore, the management was of the view that no wealth tax was payable.

The Disciplinary Committee (DC), after consideration of the facts of the case, has taken the view that there could be difference of opinion on the question of valuation of an asset and the same in no way can be construed to be a lack of due diligence or gross negligence. On this basis the member was held to be Not Guilty of Professional or other Misconduct.

(ii) Case of SSR
(Reported on Page 1 of Disciplinary cases published by ICAI Vol – II, BoD – Part II)

In this case the complaint was that the Member had accepted Tax Audit assignment of the company in which the complainant was the Auditor in earlier years without communicating with the complainant. The defence of the Member was as under:

(i) T he complainant who had conducted Tax Audit in earlier years had declined to continue Tax Audit for the year under complain.

(ii) The company had informed the complainant that they were searching a new firm of auditors for Tax Audit. The management informed the member that they had taken consent of the outgoing auditors for appointment of the Member as Tax Auditor.

(iii) The member had taken oral consent of the complainant for his appointment as Tax Auditor. He was informed that no fees of complainant were outstanding. He also submitted that he was not aware that written consent of the complainant was required to be taken.

The Board of Discipline (Board) noted that during the course of proceedings the complainant had made a request for withdrawal of the complaint. The Board also noted that the member had accepted his mistake with respect to non–communication with previous auditor in writing due to ignorance of the relevant provisions of C.A. Act. The Board held that although there was a technical flaw on the part of the member, yet considering the fact that the member had taken oral consent of the complainant, which fact was accepted by the complainant, and the complainant had made a request to withdraw the complaint, the benefit should be given to the member. On this ground it was held that the member was not guilty of professional or other misconduct.

(iii) Case of JCD.
(Reported on P.150 of Disciplinary cases published by ICAI VoL – II – BoD – Part II)

In this case the complainant firm was statutory auditors of the company for last 10 years. The complainant was also Tax Auditors of the company for all these years. For the year 2010-11 the complainant firm had completed Tax Audit and the same was not finalised because some points were pending compliance by the company. Since there was no compliance up to 25-09-2011, the complainant contacted the company when he was informed that the company had obtained the Tax Audit Report from another auditor. The complaint was that the member had accepted the Tax Audit assignment without prior communication with the complainant.

During the course of hearing before the Board, the complainant submitted that he had discussed the matter with the Member and as a good gesture, he wanted to withdraw the complaint. The Board noted that there was some miscommunication regarding the receipt of communication by the complainant from the Member which appears to have been sorted out. On this basis the Board held that the member was not guilty of professional or other misconduct.

2. Financial Report Review Board (FRRB)

In the publication of ICAI “Study on Compliance of Finance Reporting Requirements” following observations have been made by FRRB.

(i) Para 29 of AS-6 (Depreciation Accounting) (P.49)
In one case the accounting policy regarding depreciate was stated as under:

“In case of ‘X’ unit and ‘Y’ unit depreciation is calculated at straight line method and in all other units the WDV method has been followed.”

FRRB has referred to Para 29 of AS – 6 and observed that although the company has disclosed the depreciation methods adopted by it but the rates of useful life of such units are not disclosed. Being silent on this aspect cannot be construed that depreciation is charged at specified rates. Hence the above disclosure was not in accordance with the requirements of AS-6

(ii) Para 1 and 3.2 of AS-6 (P.50)
In the published accounts of some companies FRRB noticed that no depreciation on “Leasehold Land” was provided.

FRRB has taken the view, relying on Para 1 and 3.2 of AS-6, that Leasehold Land has limited useful life and, as such, it should be amortised as required by AS-6. In the above cases, this was not done and therefore the Depreciation Accounting was not in compliance with AS-6.

(iii) Para 28 of AS-6 (P.52)
In the case of a company, while accumulated depreciation for each class of assets was disclosed, the depreciation provided for the year against each item of asset has not been separately disclosed.

Referring to Para 28 (ii) of AS-6, FRRB has observed that under AS-6 “total depreciation for the period for each class of assets” should be disclosed. In this case, although accumulated depreciation was disclosed, no disclosure of depreciation for the year for each class of asset was not made. Thus the mandatory requirement of AS-6 was not complied with.

3. Applicability of Tax Rate in Quarterly Financial Results.

Facts:
A Central Public Sector Undertaking Company (Listed Company) is engaged in mining of bauxite, manufacturing of alumina and aluminium, generation of power in captive power plant for use in smelter plant and selling alumina and aluminium both in domestic and international market. Paid up share capital of the company is Rs.1,288.62 crore out of which 81.06% shares are held by the Government of India and 18.94% are held by the Public. As per the provisions of clause 41 of the Listing Agreement, the quarterly un-audited financial results are to be furnished to stock exchanges and be published in newspapers.

While computing the quarterly financial results, the company considers provision for tax expense by considering the computed taxable income upto that period based on the applicable tax rate for the said financial year.

The principles for recognition and measurement of tax expense are laid down in paragraph 29 (c) of AS 25 which states that the tax expense in each interim period is to be recognised based on the best estimate of the weighted average annual income tax rate expected for the full financial year.

As per the practice followed by the company consistently, at every quarter ending day, actual tax expense is provided based on the financials/ performance upto that period.

Query
In the above background, the Company has sought opinion of the EAC on the following issues:

(i)    Whether the principles mentioned in AS 25, particularly, the principles for recognition and measurement of tax expense as laid down in paragraph 29(c) of AS 25 would apply to unaudited quarterly financial results prepared to comply with clause 41 of Listing agreement which are subject to limited review by the statutory auditors.

(ii)    Whether the existing practice of recognising provision for tax expense by considering the computed taxable income for the relevant period based on applicable tax rate is in contravention of the provisions of AS 25.

EAC opinion:
After considering, clause 41(IV)(f) of the Listing Agreement and paragraphs 1, 2, 27 and 29 of aS 25, the Com- mittee noted that clause 41 of the Listing agreement specifically requires that quarterly and year to date results should be prepared in accordance with the recognition and  measurement  principles  laid  down  in  AS  25.  The Committee also noted that the Guidance note on applicability of aS 25 to interim Financial results, issued by the ICAI does not lay down any new accounting principle and is only providing guidance on the application of a mandatory Standard (viz. AS 25). Therefore, the Committee is of the view that the company should follow the requirements of aS 25 as explained in the Guidance note and should apply the recognition and measurement requirements as contained in paragraph 29 (c) of AS 25 to the interim financial results presented under clause 41 of the Listing agreement. Thus, whether or not the Guidance note is binding or is recommendatory in nature is not relevant as the relevant requirements of the Standard are binding on the company. The Committee further noted that paragraph 29(c) of AS 25 requires that income tax expense should be recognised in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year.

The Committee also noted from the Facts of the case that while computing the quarterly financial results, the company considers provision for tax expense by considering the computed taxable income upto that period based on the applicable tax rate for the said financial year. On the basis of the above, the Committee is of the view that the accounting practice of the company to provide for tax expenses at the quarterly/interim period results based on the applicable tax rate for the said financial year would be correct provided such tax rate is the rate that would be applicable to the expected total annual earnings of the company for the whole year, that is, the estimated average annual effective income tax rate. In this regard, the Committee has pointed out that the tax expense for each interim period is not to be determined on the basis of average of estimated annual tax expense rather it is to be determined on the basis of estimated average annual effective income tax rate applied to the portion of income earned in the interim period. Thus, if in an interim period, there is a profit but in other interim periods, there are losses resulting into nil taxable income for the financial year, tax expense in each interim period will be provided for by applying estimated average annual effective income tax rate to the income (profit or loss) of those interim periods. In other words, if there are profits in the first quarter, the company has to provide tax liability in the first quarter at the appropriate estimated average annual effective income tax rate, which would get reversed in subsequent quarters if there are losses. For the purpose of calculating the estimated average annual effective income tax rate, guidance may also be taken from the Guidance note on measurement of income tax expense for interim Financial reporting in the Context of AS 25, issued by the ICAI.

The existing practice of recognising provision for tax expense by considering the computed taxable income for the relevant period based on applicable tax rate for the said financial year would be correct provided such tax rate is the rate applicable to the expected total annual earnings of the company for the whole year, that is the estimated average annual effective income tax rate.
[Pl. refer page nos.  1092 to 1095 of the C.A. journal – February, 2015]

4.    ICAI News
(Note: Page Nos. given below are from CA Journal for February 2015

(i)    November, 2014 Final examination results (P.1158)

First Rank    : Vijendra Aggarwal, Gurgaon (69.75%)
Second Rank : Ms. Pooja R. Parekh,ahmedabad (69.50%)
Third Rank    : Santosh P. Nankani, nandubar(69.13%)
Ms. nikita Goel, howrah (69.13%)

(ii)    November, 2014 iPCC Examination

(iii)    CPT Examination – december 2014 (P.1157)

(iv)    late Shri rameshwarji Thakur

One of our former Presidents, Shri Rameshwarji Thakur, passed away on 15th january 2015 at the age of 86.  He was our President in 1966-67. He was also a Freedom Fighter and an active member of our profession. He held the prestigious positions as union minister of State and later as Governor of madhya Pradesh, odisha, andhra Pradesh and Karnataka. We all condole his death and pay our respectful homage to the departed soul. We pray that the departed soul may rest in peace.

(v)    New chapters of ICAI (P.1043)
Following new oversees chapters of iCai have been established in February, 2015.

(a)    24th Chapter at Vancouver (Canada)
(b)    25th Chapter at Bangkok (thailand)
(c)    26th Chapter at dar es Salam (tanzania)

(vi)    revision in rates of Stipend to Articled assistants:

By notification dated 23-01-2015 issued by ICAI the rates for stipend payable by Chartered accountants to their articled Assistants have been revised as under:-

(vii)    Our New President and Vice-President:

ICAI Council has elected Shri Manoj Fadnis (Indore) as President and Shri Devaraja Reddy M (Hyderabad) as Vice-President for the year 2015-16. Our greetings and best wishes to both for a successful term of office.