It is reported that the Disciplinary Committee has given its decision and awarded punishment in the cases of Shri Srinivas Talluri, partner of M/s. Price-Waterhouse & Co., and Shri Srinivas Vadlamani, the former CFO of Satyam Computers. It is also reported that the Committee has held Shri Srinivas Talluri guilty of gross negligence in the performance of his duties as auditor and his membership is cancelled for life and a penalty of Rs.5 lac is imposed. Similarly, in the case of Shri Srinivas Vadlamani the Committee has barred him from attesting financial statements for life and also levied a penalty of Rs.5 lac.
2. EAC Opinion Accounting treatment of success fee paid to the financial advisors
Facts
A government company registered under the Companies Act 1956, is a wholly-owned subsidiary of listed government company. The shares of the company are not listed with any stock exchange. The company is engaged in activities relating to exploration and production of oil and gas. The company is holding participating interest (PI) in various oil and gas blocks. The company along with another company ‘V’ has acquired company ‘A’ in joint venture. Company ‘B’ is 100% subsidiary of company ‘A’, which holds the PI in oil and gas blocks in Brazil.
The company appointed financial advisors to carry out: (i) financial due diligence, (ii) develop a detailed financial model and other methodologies to determine the transaction value, (iii) analyse various risks associated with the projects, (iv) valuation of company/project, (v) assisting in appointment of technical, legal and tax consultants, (vi) listing out various financial options available to the company, and (vii) preparing the bidding strategy to acquire the proposed equity interest or participating interest by the seller.
For this purpose, the fees payable was a fixed fee of US $ 2,50,000; if for any reason the transaction does not consummate and a success fee of 0.70% of the bid price, payable on successful closure of the transaction. The company has pointed out that the fixed fees shall not be payable if engagement is commenced, but the financial advisors are unable to continue or complete the transaction for reasons attributable to them. Notwithstanding this, payment of fixed fees shall become due and payable only after 90 days from the date of signing of the agreement with them.
Thereafter, the financial advisors submitted the report along with the presentation and the same was deliberated upon by the company and company ‘V’. After the internal deliberations the strategy meeting between the company and company ‘V’ for acquiring company ‘B’ was held wherein it was decided to bid for the various basins held by company ‘B’. An amount of Rs.2,40,95,418, (being 0.70% of bid price of US $ 82.5 million) after TDS was paid, to the financial advisors against the bill of the financial due diligence, etc.
Query
The company has treated the above success fees as revenue expenditure in the books of the company. Whether the aforesaid treatment is correct? If not, then what is the correct accounting treatment?
Opinion
The EAC noted that the underlying assets (PI) are not in the books of the company. The expenditure on account of success fees was incurred at the bidding process stage before the formation/ incorporation of company ‘A’. The success fee has relation to bidding process for PI and has no relation to the acquisition of equity shares in company ‘A’. Hence, the company has incurred the expenditure on fee to financial advisors for a commercial advantage which is to be availed through its joint venture company ‘A’, in whose books, the investment in company ‘B’ would appear. After considering paragraphs 28, 29 and 32 of Accounting Standard (AS) 13, ‘Accounting for Investment’ the committee took the view that in the present case the expenditure on fee paid to financial advisors cannot be included in the ‘cost of Investment’ at the time of initial recognition. Such expenditure also does not become part of carrying amount of the investment in the shares of company ‘A’ as the investment is to be carried at cost, with only diminution to be recognised under certain circumstances. Further, the committee noted that the term ‘asset’ has been defined in the Framework for the Preparation and Presentation of Financial Statements, issued by the Institute of Chartered Accountants of India as “a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise”. Therefore, the committee is of the view that expenditure on fixed fee and success fee does not result into a resource control by the company and accordingly, it cannot be capitalised as an asset.
In view of the above, the expenditure on ‘fixed fee’ and ‘success fee’ incurred by the company does not meet the definition of an asset and should be expensed in the statement of profit and loss. Therefore, the treatment given by the company in its books of account is correct.
(Refer page Nos. 1202 to 1204 of C.A. Journal, February 2012) 3.
Results of Final C.A. Examination — Nov. 2011
Results of the above examination were declared in January, 2012. Analysis of the results of examinations held in last two years are as under.
4. Campus placement February-March, 2012 ICAI has organised campus placement programme for the newly qualified Chartered Accountants during February-March, 2012, at 17 centres. Detailed announcement about this programme is available
at www.cmii.icai.org. The places and dates are as under. The newly qualified members can take advantage of this facility at their respective cities.
(i) Baroda, Chandigarh, Indore, Kanpur and Nagpur 22-23 February, 2012
(ii) Bhuvaneshwar, Coimbatore and Ernakulam 23-24 February, 2012
(iii) Ahmedabad, Jaipur and Pune 27-29 February, 2012
(iv) Chennai, Mumbai and New Delhi 26-31 March, 2012
(v) Banglore, Hyderabad and Kolkata 28-31 March, 2012 (Refer page 1279 of C.A. Journal for February, 2012)
5. ICAI News
(Note :Page Nos. given below are from C.A. Journal for February, 2012)
(i) Vision 2030
ICAI has released ‘ICAI Vision 2030’ at its Annual Function held on 11-2-2012. Copies can be obtained from ICAI office. (Page 1142)
(ii) Health Insurance from members and students
ICAI has tied up with New India Assurance Co. Ltd. for launching a special scheme for members and C.A. students. Details are available at www. icai.org.in (Page 1142).
