1. Code of Ethics:
The Ethical Standards Board of ICAI has given answers to some ethical issues raised by our members. These are published on pages 226 to 228 of C. A. Journal for August, 2013. Some of these issues are as under:
Issue:
What is Code of Ethics?
Every profession has its own Code of Ethics. The Chartered Accountants Act, 1949 has been enacted by Parliament for the regulation of the profession of Chartered Accountants and for the purpose of carrying out the object of the Act, the Chartered Accountants Regulations, 1988 have been enacted. The Act has two schedules i.e., First Schedule and Second Schedule.
The first Schedule has four parts:
Part I – Professional misconduct in relation to Chartered Accountants in Practice.
Part II – Professional misconduct in relation to Members of the Institute in Service.
Part III – Professional misconduct in relation to Members of the Institute generally.
Part IV – Other Misconduct in relation to the Members of the Institute generally.
The Second Schedule has three parts:
Part I – Professional misconduct in relation to Chartered Accountants in Practice.
Part II – Professional misconduct in relation to Members of the Institute generally.
Part III – Other misconduct in relation to members of the Institute generally
These two schedules along with the decisions of the Courts on profession misconducts, decisions, directions, guidelines, statement, clarifications and also interpretations of the Council on the various clauses of these two schedules constitute the Code of Ethics for the accountancy profession.
Issue:
What is Professional or other misconduct?
Section 2 of the Act defines professional or other misconduct as follows:
For the purposes of this Act, the expression “professional or other misconduct” shall be deemed to include any act or omission specified in any of the Schedules, but nothing in this section shall be constructed to limit or abridged in any way the power conferred or duty cast on the Director (Discipline) u/s.s. (1) of Section 21 to inquire into the conduct of any members of the Institute under any other circumstances.
What constitutes “misconduct under any other circumstances” has to be determined on a caseto- case basis keeping in view the facts of the circumstances of each case. Fraud, intention to deceive and committing an act which affects the public or society at large could be in the ambit of such misconduct. Following are few examples of “misconduct under any other circumstances” by a member:
1. Conviction by a competent Court for an offence involving moral turpitude punishable with imprisonment or for an offence not of a technical nature committed by a member in his professional capacity.
2. Retention of books and documents of the client and failure to return these to the client on request without a reasonable cause.
3. Material misrepresentation e.g. misrepresenting to a firm, while seeking employment as an accountant, that he has worked for three years as a senior assistant with another firm.
4. Publishing an advertisement in a newspaper with mala fide intention to malign any person.
5. Using objectionable, derogatory and abusive language or/and making irrelevant, incoherent, irresponsible and insane statements in his correspondence with a person.
Issue:
Whether a member in practice is permitted to undertake the management of NRI funds?
No, the member is not permitted to undertake such assignment because the same is not covered under “Management Consultancy and Other Services” permitted to be rendered by the practicing members of the Institute.
Issue:
Can a Chartered Accountant provide ‘Portfolio Management Services’ (PMS) as part of CA practice?
No, the Explanation to Clause (xix) of the definition of “Management Consultancy and other Services” expressly bars the activities of broking, underwriting and Portfolio Management.
Issue:
Whether a Chartered Accountant in practice is not required to obtain any trade license for practicing?
No, a Chartered Accountant in practice is not required to obtain any trade license for practicing as a professional. The certificate issued by the Institute is the only requirement to practice as a Chartered Accountant.
Issue:
Can a Chartered Accountant in practice work as a Collection Agent/Recovery Agent?
No, a Chartered Accountant in practice cannot work as a Collection Agent. However, he can act as a Recovery Consultant as provided in clause (xxv) of “Management Consultancy and other Services”.
2. EAC Opinion:
Adjustment of losses on Sale of Fixed Assets, Writing-Off Inventory and Doubtful receivables against Capital Reserves Arising Out of Acquisition of Business, Capital Redemption Reserves and Revaluation Reserves.
Facts
A company (hereinafter referred to as ‘the company’) is a 50:50 joint venture between two companies. The company is in the business of manufacture and sale of power/telecom cable joining kits, transformers, gas meters, energy meters & corrosion protection products and providing services. During the financial year 2010- 11 (i.e., w.e.f. 24th September, 2010), the company acquired the energy business, consisting of manufacture and sale of connectors, fittings and insulation products from another company, ‘A’ Pvt. Ltd, Bangalore, on a going concern basis under slump sale agreement. Based on valuation report from an independent valuer, the company has recognised fixed assets, inventories and liabilities at fair value and a capital reserve of Rs. 1476.72 lakh being excess of assets acquired over purchase consideration paid. A part from the above-mentioned capital reserve, the company also has capital redemption reserve and revaluation reserve in its books as on 31-03- 2011. This break-up is as follows:
Rs. in lakh
Capital reserve created as above 1,476.72
Revaluation reserve 82.17
Capital redemption reserve 250.00
1,808.89
2. During the financial year 2012-13, the company has passed the following two entries by debiting the above capital reserve:
(i) Non-moving inventory acquired out of the above acquisition amounting to Rs. 1,06,813.10 written off by debiting the above capital reserve.
(ii) Fixed assets acquired out of the above acquisition have been scrapped and loss amounting to Rs. 1,04,117.81 has been debited to the above capital reserve.
Query
In this context, the querist has sought the opinion of the EAC as to whether the correct accounting treatment has been applied by the company by debiting the above-mentioned reserves as per the provisions of the Accounting Standards and the Companies Act or any other law?
Opinion:
The Committee noted that the basic issue raised by the querist relates to adjustment of losses on sale/disposal of fixed assets, writing-off inventories and old and doubtful receivables against capital reserves created from business acquisition, and capital redemption reserves and revaluation reserves already standing in the books of the company.
The Committee notes that the Companies Act, 1956, does not specifically contain any provision for utilisation of capital reserve and revaluation reserve, Further, the Companies Act, 1956, does not envisage utilisation of capital redemption reserve for writing-off losses on sale of fixed assets as well as for writing-off inventory and doubtful receivables.
As regards accounting for non-moving inventories, the Committee is of the view that these represent obsolescence of inventories which would be reflected in the determination of net realisable value of the inventories. In the context of writing down the inventories to their net realisable value, the Committee after considering paragraphs 5 and 12 of Accounting Standard (AS) 5, ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, notified under the ‘Rules’, is of the view that write-off of non-moving inventory should be included in the statement of profit and loss.
Further, as regards write-off of inventories due to shortages observed in the acquisition of business and writing off of old and doubtful receivables, the Committee is of the view that these represent losses. The Committee after considering paragraphs of the Framework for the Preparation and Presentation of Financial Statements, issued by the Institute of Chartered Accountants of India, is of the view that losses also represent expenses and accordingly, these should be charged to the statement of profit and loss as per the requirements of paragraph 5 of AS 5.
Accordingly, the Committee is of the view that any write-off of inventories and receivables cannot be adjusted against capital reserves, capital redemption reserves and revaluation reserves.
[Please refer to pages 263 to 265 of C.A. Journal, August vbn, 2013]
3. ICAI News:
a) Non-applicability of SA 700 on Tax Audit Reports:
The members are well aware that all audit reports in respect of audits of financial statements for the period beginning on or after 1st April, 2012 have to be issued in accordance with the requirement of SA 700 (Revised) – “Forming on opinion and Reporting on Financial Statements”. The ICAI has clarified that since all the tax audit reports i.e., Form No./3CA/3CB are now mandatorily required to be filed online and that format of tax audit report is prescribed by the Central Government requires suitable changes in the forms, the applicability of SA 700 (Revised) on tax audit report is deferred by one year.
[Refer Page 203 & 204 of C. A. Journal, August, 2013]
b) Examination Results:
Results of C. A. final and CPT examinations held in May, 2013 have been declared in July 2013. The details of percentage of candidates passed along with percentage are given below:
