1. Code of Ethics:
The Ethical Standards Board of ICAI has given answers to some of the Ethical Issues raised by our members. These are published on pages 726-728 of the CA Journal for November, 2012. Some of these issues are as under:-
(i) Issue: Whether a Chartered Accountant who is appointed as tax auditor for conducting special audit under the Income-tax Act by the IT Authorities is required to communicate with statutory auditor?
Comment: Council direction under Clause (8) of Part I of First Schedule to the Act, prescribes that it would be a healthy practice, if a tax auditor appointed for conducting special audit under the Income-tax Act, communicates with the members who have conducted the statutory/tax audit.
(ii) Issue: Whether it is obligatory for the auditor appointed to conduct a special Audit u/s. 233A of the Companies Act, 1956 to communicate with the previous auditor, who has conducted the regular audit for the period covered by the special audit.
Comment: Council direction under Clause (8) of Part 1 of the First Schedule to the Act prescribes that it is not obligatory for the auditor appointed to conduct a special audit u/s. 233A of Companies Act, 1956 to communicate with the previous auditor who has conducted the regular audit for the period covered by the special audit.
(iii) Issue: Whether communication with previous auditor is necessary in case of appointment as statutory auditor by nationalised and other banks?
Comment: Clause (8) of Part 1 of the First Schedule to the Act is equally applicable in the case of nationalised and other banks and also to Government agencies.
(iv) Issue: Whether communication by the incoming auditor is mandatory with the previous auditor in respect of various audit assignments, like the concurrent audit, revenue audit, tax audit and special audits, etc?
Comment: The requirement for communicating with the previous auditor would apply to all types of audits viz. statutory audit, tax audit, internal audit, concurrent audit or any other kind of audit. The Council has laid down detailed guidelines in this regard and the same are appearing at pages 166-168 in the Code of Ethics, 2009 edition.
(v) Issue: Whether a Chartered Accountant or a firm of Chartered Accountants can charge or offer to charge professional fees based on a percentage of turnovers?
Comment: In terms of Clause (10) of Part 1 of First Schedule to the Act, it is not permitted to a Chartered Accountant or a firm of Chartered Accountants to charge fees as a percentage of turnover, except in the circumstances provided under Regulation 192 of the CA Regulations, 1988.
“192, Restriction on fees
No Chartered Accountant in practice shall charge or offer to charge, accept or offer to accept, in respect of any professional work, fees which are based on a percentage of profits, or which are contingent upon the findings, or results of such work.
Provided that:
(a) in the case of a receiver or a liquidator, the fees may be based on a percentage of the realisation or disbursement of the assets;
(b) in the case of an auditor of a co-operative society, the fees may be based on a percentage of the paid up capital or the working capital or the gross or net income or profits; and
(c) in the case of a valuer for the purposes of direct taxes and duties, the fees may be based on a percentage of the value of the property valued”.
(vi) Issue: Whether a statutory auditor can be appointed in the adjourned meeting in place of existing statutory auditor, where no special notice for removal or replacement of the retiring auditor is received at the time of the original meeting.
Comment: If any AGM is adjourned without appointing an auditor, no special notice for removal or replacement of the retiring auditor received after the adjournment can be taken note of and acted upon by the Company. U/s 190(1) of the Companies Act, such special notice can be given to the company at least 14 days before the meeting. In this section, reference is to the original meeting and not to an adjourned meeting.
2. EAC Opinion:
Facts:
A company is a wholly owned subsidiary of a listed public sector undertaking (‘the holding company’). The company was incorporated in the year 2002 under the Companies Act. The main object of the company, inter alia, is to acquire, establish and operate electrical systems etc. for distribution and supply of electrical energy, to undertake works on behalf of others and to act as engineers/consultants.
The company has stated that all the personnel of the company are employees on the rolls of the holding company and are under deputation to the company on Secondment basis. Every month, actual share of employees related expenses of the company, like salary, provident fund (PF) contribution, etc. are being debited to the company by the holding company, for payments and accounting purpose. Other employee benefits like retirement benefits are allocated at the year end and accordingly accounted for in the accounts of the company, payable to the holding company. The holding company has constituted separate trusts and administering and managing employee benefits towards gratuity and provident fund.
The company has further stated that the holding company gets the actuarial valuation done, at the year end, for all of its employees together, including those deputed to its subsidiary companies. In other words, no separate valuation report is obtained for the employees of subsidiary companies. Therefore, identifying employee liability and corresponding plan assets attributable to the personnel on deputation to its subsidiaries is not possible. However, the amount being proportionate share of expenses (for the year under consideration) is determined by the actuary and allocated to the subsidiary companies for accounting purpose. Therefore, the company and the auditor of the company rely upon the allocated figure for recognising expenses in the profit and loss account of the company. As a corollary, all the other information required to be disclosed as per paragraphs 119 and 120 of Accounting Standard (AS) 15, ‘Employee Benefits’ is not available, and is not disclosed in the Notes on Accounts. The expenses on account of long term defined benefits included for actuarial valuation are gratuity, leave encashment, post retirement medical benefits, transfer/travelling allowance on retirement/death, long service awards to employees, farewell gift on retirement of economic rehabilitation scheme.
In the case of provident fund, however, the accounting is done on the basis of actual contribution, although the holding company in its financial statements admits it as a defined benefit. The company is of the view that actuarial valuation is not required for provident fund liability. Further, the holding company (sponsor employer) is not making disclosures in its financials as required by paragraphs 19 to 120 of AS 15 in the case of provident fund, unlike in the case of other defined benefits.
Query
On these facts, the company has sought the opinion of the EAC on the issue: (i) whether the position of the company that it is not liable to make complete disclosure in its separate financial statements, in view of the facts that the same have been done by the holding company, is correct? and (ii) Whether the company’s policy of accounting for the provident fund based on actual contribution instead of actuarial valuation basis (and not making disclosures even in its parent’s financial as a defined benefit, as required in paragraph 119 and 120 of AS 15) is correct?
Opinion:
After considering paragraphs 33 to 35 of AS 15, the Committee is of the view that the multi-employer and group administration plans are completely different from each other. In case of group administration plan, it is merely an aggregation of individual employer plans and therefore, the Standard itself states that the accounting related information is readily available with the participating enterprises as any other single employer. Further, the Committee notes from the Facts of the Case that in the case of the company, the holding company gets the actuarial valuation done, at the year end, for all of its employees, including those deputed to its subsidiary companies. The amount being proportionate share of expenses (for the year under consideration) is determined by the actuary and allocated to the subsidiary companies for accounting purpose. This indicates that there is a contractual agreement or stated policy based on which the proportionate issue of expenses is being allocated to the subsidiary company. Further, since there is a common scheme for the employees of the holding company and the subsidiary company, keeping in view the Facts of the Case, it appears to the Committee that in substance, the holding company is running a group administration plan.
The Committee is further of the view that the existence of such contractual agreement or stated policy through which the current service costs and obligations of defined benefit plans for employees of subsidiary company are being allocated to it clearly provides a basis for allocating the assets and obligation of the plan too. The Committee is also of the view that in case there is no such contractual agreement or stated policy to bear entire obligation relating to the employee, as per paragraph 35 of AS 15, the net defined benefit cost should be recognised in the financial statements of the enterprise which is legally the sponsor employer (holding company in the extant case) for plan and other group enterprise (subsidiary company in the extant case) should recognise a cost equal to their contribution payable for the period. Therefore, the contention of the company that it is not liable to make complete disclosures in its financial statements, in view of the fact that the same have been done by the holding company, is not correct.
With regards to accounting for contribution being made to provident fund trust, administered by the holding company, the Committee notes paragraphs 25 to 27 of AS 15 and Issue No. 9 of ‘ASB Guidance on Implementing AS 15, Employee Benefits (revised) 2005, issued by the Accounting Standard Board of the ICAI, and is of the view that (EPF) Act, 1952 empowers the Government to exempt any establishment from the provisions of the Employees’ Provident Scheme, 1952 provided that the rules of the provident fund set up by the establishment are not less favourable than those specified in section 6 of the EPF Act and the employees are also in enjoyment of other provident fund benefits which on the whole are not less favourable to the employees than the benefits provided under the Act. As per AS 15, where in terms of any plan the enterprise’s obligation is to provide the agreed benefits to current and former employees and the actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the enterprise, the plan would be a defined benefit plan. Accordingly, provident funds set up by the employers which require interest shortfall to be met by the employer would be in effect defined benefit plans in accordance with the requirements of paragraph 26(b) of AS 15”. Hence, accounting for such benefit by the subsidiary would be advisable.
3. ICAI News:
(Note: Page Nos. given below are from CA Journal for November, 2012)
(i) International Conference to be held at Mumbai:
ICAI is organising an International Conference on 24th and 25th January, 2013 at Mumbai. Theme of this Conference will be “Accounting Profession: Enablers of Economic Growth”. Delegates from Asia and Pacific Region are expected to participate in this Conference (Page 711).
(ii) The effects of changes in Foreign Exchange Rates (AS-11):
Financial Reporting Review Board (FRRB) has re-ported that in some instances, some companies have not followed the requirements of AS-II. These instances are reported on Page 834.
(iii) ICAI Publications:
(a) Compendium of Opinions – Vol XXX (Page 846)
(b) Guidance Note on Accounting and Auditing of Political Parties.
