ICAI and its members

The Ethical Standards Board of ICAI has considered some ethical issues which are published in C.A. Journal of May, 2011, at page 1653. Some of these issues are as under:

(i) Issue: Can a Chartered Accountant in practice agree to select and recruit personnel, conduct training programmes and work studies for and on behalf of a client?

Response: The ‘Management Consultancy and other Services’ as specified by the Council includes both, personnel recruitment and conduct of training programmes and work studies. As such, the same are permitted for a Chartered Accountant in practice.

(ii) Issue: Can a Chartered Accountant in practice secure any professional business through the services of a person who is not his employee or partner?

Response: The CA Act, 1949 does not permit a practising Chartered Accountant to secure, either through the services of a person who is not an employee of such Chartered Accountant or who is not his partner, any professional business.

(iii) Issue: Can a Chartered Accountant in practice seek professional work from his professional colleagues?

Response: As per CA Act, 1949 a member is permitted to apply or request for, or to invite, or to secure professional work from another Chartered Accountant in practice.

(iv) Issue: Can a Chartered Accountant in practice accept original professional work emanating from a client introduced to him by another member?

Response: A Chartered Accountant in practice should not accept the original professional work emanating from a client introduced to him by another member. If any professional work of such client comes to him directly, it should be his duty to ask the client that he should come through the other member dealing generally with his original work.

(v) Issue: Can a Chartered Accountant accept the appointment as Superior Authority by Certifying Authority for processing Digital Signature?

Response: A Chartered Accountant may accept the appointment as Superior Authority by Certifying Authority for processing Digital Signature.

(vi) Issue: Whether the Code of Ethics will be applicable outside India?

Response: The Code of Ethics of the Institute is applicable to all its members even outside India.

2. Annual Accounts of ICAI for the year ending 31-3-2010:

3. Revenue Recognition of sales in foreign currency hedged by a forward contract:

A listed manufacturing company has domestic sales as well as export sales and the company has the following forex hedging strategy for currency risk:

(a) The hedged exposures/forecasted cash flows are highly probable because these are always based on signed contracts, sales orders and purchase orders.

(b) The hedge documentation (such as forex policy/procedure, the documentation of each individual hedge, selection of hedge instruments, etc.) is in place.

(c) There is always one-to-one relation between the hedged exposure and hedge instrument (no netting, no clubbing together of hedged items).

(d) The relation of hedged item versus hedge instrument is 100% effective and can be measured accordingly.

After entering into an export order the company takes forward cover for the full amount of the sales invoice which is receivable in US Dollars normally after sixty days. The forward cover is also taken for sixty days.

Query:
In the light of the above, the company has sought the opinion of the EAC regarding revenue recognition on the following issues:

(i) The rate at which the sale should be accounted, (a) whether at the rate on the date of bill of lading, on which date the property in goods has passed on to the customer as per the contract, or (b) at the forward contract rate i.e., the rate at which the company will be realising the sale proceeds from the customer on due date.

(ii) It is assumed that the customer will not fail on the due date for the purpose of the above. If customer fails to pay on the due date what will be the opinion of the Committee.

(iii) Will the company be complying with (a) Accounting Standard (AS) 9, ‘Revenue Recognition’; (b) Accounting Standard (AS) 11, ‘Effects of Changes in Foreign Exchange Rates’, (c) Accounting Standard (AS) 30, ‘Financial Instruments: Recognition and Measurement’, (d) AS 31, ‘Financial Instruments: Presentation’ and (e) AS 32 ‘Financial Instruments: Disclosure’, dealing with hedge accounting?

Opinion of EAC:

After considering paragraph 9 of Accounting Standard (AS) 11, the Committee is of the view that the sales in the instant case should be recorded by applying the exchange rate at the date of the transaction. The transaction date for the purpose of recognition of revenue would be the date on which the significant risk and rewards of the ownership of goods are transferred to the buyers.

Further, considering the Accounting Standard (AS) 9, the Committee is of the view that the revenue should not be recognised unless it is reasonably certain that the ultimate collection of the revenue will be made. However, if the uncertainty relating to collectability arises subsequent to the recognition of revenue, a separate provision for the uncertainty should be recognised.

Furthermore, the Committee clarified that for the accounting purposes, the issue of recognition of revenue is independent of the accounting for foreign exchange transactions, including hedging. Accounting for sale. i.e., recognition of revenue in the present case would be governed by the provisions of AS-9. Accounting for foreign exchange transactions, including hedging, is governed by AS-11 and/or AS-30 depending upon the nature of the transaction. In the instant case, since the transactions undertaken by the company have been stated by the company to be highly probable forecast transactions, forward exchange contracts in respect of these transactions can be accounted for as a cash flow hedge considering the provisions of AS-30. So, if the company accounts for revenue (sales) at forward contract rate it will not be complying with the requirements of AS-9, AS-11, AS-30 and AS-32. AS-31 is not relevant in the present case.

(Refer pages 1650 to 1652 of C.A. Journal of May, 2011)

4. Amendments in Service tax relating to Chartered Accountants:

(i) Point of Taxation Rules, 2011, have come into force from 1-4-2011. Under these Rules, Service tax will be payable on the date of invoice or payment, whichever is earlier. If the invoice is not issued within 14 days of rendering the services, the tax is payable from the date of rendering such service. Option is given to assessees to postpone the effective date to 1-7-2011 under certain circumstances.

(ii) However, due to efforts of ICAI and other professional bodies, in the cases of Chartered Accountants, cost accountants, company secretaries, architects or interior decorators, persons rendering legal, scientific or technical consultancy service, a concession is given to these professionals to pay Service tax on receipt of fees, as at present.

(iii) By a Notification No. 25/2006, dated 13-7-2006 exemption was given to practicing Chartered Accountants, cost accountants and company secretaries in respect of professional fees received by them from clients for representation before tax or other statutory authority. This exemption is now withdrawn w.e.f. 1-5-2011 by a Notification No. 32/2011, dated 25-4-2011. Therefore, these professionals will have to charge Service tax on fees to be charged to clients for representation before tax and other statutory authorities.

5. ICAI News:

(Note: Page Nos. given below are from C.A. Journal of May, 2011)

All companies that are part of coverage in Phase-I would be the following class of companies which will be required to file the financial statements in XBRL form only from the year 2010-11:

•     All companies listed in India and their subsidiaries, including overseas subsidiaries;

•     All other companies having paid up capital of Rs.5 crore and above or a turnover of Rs.100 crore or above.

All companies covered by Phase-I would be permitted to file the above financial statements up to 30-9-2011 without any additional filing fee. (Page 1649)

(ii) DISA holder to conduct system audit:

The RBI vide its recent Circular relating to submission of system audit reports has allowed a holder of a Diploma in Information System Audit (DISA) of the ICAI to conduct audit of Authorised Payment System Operators and Entities, apart from a Certified Information Systems Auditor (CISA) and registered with Information Systems Audit and Control Association. (Page 1610)

(iii) Appellate Authority under C.A. Act:

The Appellate Authority u/s. 22A(1) of the Chartered Accountants Act, 1949 was constituted by the Central Government in March, 2009, but the same was not functional, as the Chairperson of the

Authority had not taken charge. Recently, Justice Shri S. N. Dhingra (Retd.) has been appointed by the Government as the Chairperson. Shri Dhingra along with the representatives of all the three institutes would meet the MCA Secretary where it would be, inter alia, proposed to request for an office space for the Appellate Authority that is currently housed in the ICAI headquarters in New Delhi. (Page 1611)

(iv)    Recommended fee structure on professional assignment:

The Council of ICAI has recommended the minimum scale of fees for professional assignments undertaken by our members. Separate fees are recommended for members practising in metros and non-metros. Details are available on the website of ICAI. Broadly stated, these fees are as under:

Note: Separate minimum fees are recommended for work relating to (a) VAT/Profession Tax, (b) Audit and other assignments, (c)    Management services, (d) Investigation, (e) Certification, (f) Consultation, (g) Arbitration, (h) NBFC, RBI matters, (i)    FEMA matters, (j) Service tax, and (k) Project Financing. (Page 1610)