1. Code of ethics
The Ethical Standards Board of ICAI has considered some of the ethical issues which have been published in C.A. Journal of December, 2011 at pages 842-844 and are as under.
(i) Issue : What is the status of a Chartered Accountant who is a salaried employee of a Chartered Accountant in practice or a firm of such Chartered Accountants?
An associate or a fellow of the Institute who is a salaried employee of a Chartered Accountant in practice or a firm of such Chartered Accountants shall, notwithstanding such employment, be deemed to be in practice for the limited purpose of the training of articled assistants. He may hold Certificate of Practice, but he is not entitled to perform attest functions.
(ii) Issue: Can a member in practice be promoter/ Promotor director of a company?
There is no bar to a member in practice becoming a promotor/signatory to the Memorandum and Articles of Association of any company. For becoming such promotor/signatory, members are not required to obtain specific permission of the Council. There is also no bar for such a promotor/signatory becoming Director simplicitor of that Company, irrespective of whether the objects of the company include areas which fall within the scope of the profession of Chartered Accountants. In this case also, specific permission of the Council is not required.
(iii) Issue: Can a member in practice be a sleeping partner in family business concern?
A member in practice can be a sleeping partner in a family business concern, provided he takes specific permission from the Council in terms of Regulation 190A of the CA Regulations.
(iv) Issue: Can a member share profits with the widow of his deceased partner?
When there are two or more partners and one of them dies, the widow of the deceased partner cannot receive a share of the profit of the firm. However, such widow of a deceased partner, would be entitled to share the profits only where the partnership agreement contains a provision that on the death of the partner, his widow or legal representative would be entitled to such payment by way of sharing of fees or otherwise for the specified period.
(v) Issue: Can there be any sharing of fees between the widow or the legal representative of the proprietor of a single-member firm and the purchaser of the goodwill of the firm on the death of the sole proprietor of the firm?
There could not be any sharing of fees between the widow or the legal representative of the proprietor of a single-member firm and the purchaser of the goodwill of the firm on the death of the sole proprietor of the firm. Payment of goodwill to the widow is permissible in such cases only for the goodwill of the firm and to enable such payments to be made in instalments, provided the agreement of the sale of goodwill contains such a provision. These payments, even if they are spread over the specified period, should not be linked up with participation in the earnings of the firm.
2. Conversion of a CA firm into Limited Liability Partnership (LLP)
ICAI has issued detailed guidelines for conversion of CA firms into LLPs on 4-11-2011. These guidelines are published on pages 939-941 of CA Journal for December, 2011. Some of the salient features of these guidelines are as under.
(i) All existing CA firms who want to convert themselves into LLPs are required to follow the provisions of Chapter-X of the Limited Liability Partnership Act, 2008 read with Second Schedule to the said Act containing provisions of conversion from existing firms into LLP.
(ii) In terms of Rule 18(2)(xvi) of the LLP Rules, 2009, if the proposed name of LLP includes the words ‘Chartered Accountant’ or ‘Chartered Accountants’, as part of the proposed name, the same shall be referred to ICAI by the Registrar of LLP and it shall be allowed by the Registrar only if the Secretary, ICAI approves it.
(iii) If the proposed name of LLP of CA firm resembles with any other non-CA entity as per the naming Guidelines under the LLP Act and its Rules, the proposed name of LLP of CA firm may include the word ‘Chartered Accountant’ or ‘Chartered Accountants’, in the name of the LLP itself and the Registrar, LLP may allow the same name, subject to compliance to Rule 18(2)(xvi) of the LLP Rules as referred above.
(iv) For the purpose of registration of LLP with ICAI under Regulation 190 of the Chartered Accountants Regulations, 1988, the partners of the firm shall apply in ICAI Form No. 117 and the ICAI Form No. 18 along with copy of name registration received from the Registrar of LLP and submit the same with the concerned regional office of the ICAI. These Forms shall contain all details of the offices and other particulars as called for together with the signatures of all partners or authorised partner of the proposed LLP.
(v) The names of the CA firms registered with the ICAI shall remain reserved for the partners as one of the options for LLP names, subject to the provisions of the LLP Act, Rules and Regulations framed thereunder.
(vi) There are provisions relating to seniority of firms.
(vii) These guidelines will apply to conversion of proprietary firm into LLP.
(viii) There are similar provisions for formation of new LLP by Chartered Accountants in practice.
(ix) It may be noted that the following issues have not been clarified in these guidelines.
(a) Whether a CA firm converted into LLP can continue as statutory auditors of a limited company under the Companies Act and other similar Acts.
(b) Whether the proprietary concern or firm of Chartered Accountants converted into LLP will get exemption from Capital Gains Tax on transfer of capital assets, including goodwill, of the firm to the LLP. No specific exemption is provided in section 47 of the Income-tax Act on such conversion.
3. EAC Opinion
Depreciation on freehold land having mineral reserves and the internal roads constructed in the premises of the company.
Facts
A State Government company is engaged in mining and marketing of four major minerals, namely, rock phosphate, gypsum, lignite and limestone. The company was granted a mining lease for excavation of lignite for a period of 20 years and accordingly, the company has purchased/acquired a 1063.35 hectare of freehold land having estimated mineable lignite reserves to the tune of 172.90 lakh MT for sum of Rs.18,98,59,223. As per the approved mining plan, the reserves of lignite is to be mined in 20 years. The ownership of the land would, however, remain with the company after excavation of the entire lignite reserves. After complete excavation of the mining of lignite, land would not be useful for any other purposes.
According to the company, as the mining lease was for a period of 20 years, the company has adopted the accounting policy to write off the freehold land on the basis of future benefit likely to be accrued and started writing off the value of land equally @ 1/20th per annum in view of the fact that the lease is only for 20 years. This policy has been reflected in the books of account by way of note reproduced below:
“Cost of freehold mining land is amortised on the basis of future benefit likely to be accrued.”
Due to some natural hazards beyond the control of the company, the company could not excavate the requisite of lignite as per approved mine plan.
The auditors while conducting the audit have commented that the method of writing off freehold land was not commensurate with the declared accounting policy and the matching principle. According to the auditors, as per matching principle, cost and revenue should match in the period in which they occur and such as, the company should have amortised the freehold land on the proportion of lignite mined during the year and total recoverable reserves available at the beginning of the year.
The company is also having internal roads in the mine area and the same are depreciated as per Schedule XIV to the Companies Act, 1956, i.e., @ 5% p.a. on the written down value (WDV). The auditor was of the view that internal roads in the mine area should have been depreciated on the line of amortisation of land.
The company sought the opinion of EAC as to whether accounting treatments given by the company for amortisation of the land is in order or not. If not, whether the company should charge depreciation as suggested by the auditors.
Opinion
The EAC is of the view that, in this case, since the sole purpose of acquisition of the land is to exploit it for extraction of mineral recourse and extraction of such minerals is the only economic use of the land for the company, the useful life of the freehold land would be more appropriately governed by the extractable minerals available on the land extraction thereof. In other words, it would be more appropriate to depreciate the freehold land on the basis of units of minerals extracted, viz., Units of Production method. Accordingly, the Committee is of the view that the cost of acquisition of freehold land, in the case of the company, should be depreciated on the basis of the actual quantity of lignite extracted during a period as against the estimated quantity of extractable mineral reserves.
Further, EAC is of the view that the change in the method of depreciation from straight-line method to Unit of Production would result into more appropriate presentation of financial statements of the company. The impact of the change in the method of depreciation should be calculated retrospectively from the date of the concerned asset coming into use.
The EAC is also of the view that in the case of the company, the internal roads may include two types of roads — roads that might exist when the freehold land is acquired and those developed thereafter by the company to gain access to mineral reserves. The application of unit of production method for depreciation of roads does not appear to be appropriate and the same should be depreciated separately based on their useful life.
(Pages 867 to 871 of CA Journal, December 2011).
4. ICAI News
(Note : Page Nos. given below are from CA Journal for December, 2011)
i) ICAI Publications
