1. Code of Ethics
The Ethical Standards Board of ICAI has considered certain ethical issues. Some of these issues are as under:
(i) Issue No: 1
What is the Conceptual Framework approach?
Response:
It is a framework that requires a professional accountant to identify, evaluate and address threats to compliance with the fundamental principles, rather than merely comply with a set of specific rules. Professional accountants are required to apply this conceptual framework to identify threats to compliance with the fundamental principles, to evaluate their significance and, if such threats are significant, then to apply safeguards to eliminate them or reduce them to an acceptable level such that compliance with the fundamental principles is not compromised.
(ii) Issue No: 2
What are the threats involved while complying with the fundamental principles?
Response:
Compliance with the fundamental principles may potentially be threatened by a broad range of circumstances. Many threats can be categorised as (a) Self-interest threats; (b) Self-review threats; (c) Advocacy threats; (d) Familiarity threats; and (e) Intimidation threats.
(iii) Issue No: 3
What are the available safeguards that may eliminate or reduce the threats at an acceptable level?
Response:
Safeguards that may eliminate or reduce such threats to an acceptable level fall into two broad categories viz. (a) Safeguards created by the profession,legislation or regulation; and (b) Safeguards in the work environment.
(iv) Issue No: 4
What is Ethical Conflict Resolution?
Response:
Ethical conflict resolution means to resolve a conflict in the application of fundamental principles while evaluating compliance with the fundamental principles.
(v) Issue No: 5
What is Independence?
Response:
Independence requires:
Independence of Mind – The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism.
Independence in Appearance – The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm’s or a member of the assurance team’s, integrity, objectivity or professional skepticism had been compromised.
(vi) Issue No: 6
What is the conceptual Framework to Independence?
Response:
It is to be applied to specific circumstances and relationships. It gives various examples about the threats to independence that may be created by specific circumstances and relationships and also provides how professional judgment is used to threats to independence or to reduce them to an acceptable level depending on the characteristic of the individual assurance engagement.
2. EAC OPINION
Capitalisation of Borrowing Costs
Facts
(i) A Government company commenced its business in September 1987. The core business of the company is power generation at its power stations located across India. The power is fed into the regional grids and is shared by various States as per the allocation made by the Ministry of Power, Government of India and agreement with beneficiary States.
(ii) The Company has stated that the borrowing of funds is a centralised function at head office and is not on the basis of specific project appraisal. The borrowing is on the basis of statement of affairs of the company and is made for two or three projects in common and not on the basis of borrowing for one specific project. Sometimes, the loan is raised for a project even after the completion of substantial construction activity in that particular project. The interest is allocated on the actual utilisation of funds for each project. On unutilised funds, the allocation of interest to any specific project is not practical as the quantification of loan amount attributable to each specific project is not workable/possible.
(iii) The borrowings made by the company were common for various projects in general and not for a specific project. Loan amount attributable to a specific Project was also not identified/ quantified in the loan agreements executed with various banks. The utilisation of loans was made progressively based on the construction activities undertaken at various project sites. Till that time, the unutilised loan funds were kept at head office which got mixed up with the common pool of funds which was used for various purposes. These funds were also invested in short- term and long- term basis keeping in view the future requirement. The interest income earned on these investments was credited to the statement of profits and loss.
(iv) Therefore, under such circumstances, it becomes difficult, rather impossible, to indentify a particular project to which the unutilised loan fund relates and attributing interest cost to a specific project.
Query
(v) In the light of the aforementioned facts, the Company has sought the opinion of the EAC of the ICAI on the following issues. (i) Whether the accounting treatment carried out by the company, i.e. capitalising the interest on the portion of funds utilised for capital projects as capital expenditure and charging off the balance amount of interest on the unutilised portion of the funds available with the company to the statement of profit and loss, even though these were raised for two to three projects as mentioned above, is correct? (ii) Whether whole of the interest on unutilised portion of funds need to be capitalised even though the funds were not actually utilised on any of the projects under construction?
EAC Opinion:
(vi) The Committee has considered the Facts of the Case and noted that “as the company was also having sufficient surplus funds, these funds along with the unutilised funds of the borrowing were invested on short-term and long-term basis keeping in view the future requirement.”
(vii) After considering Accounting Standard (AS 16) “Borrowing Cost” the committee has stated that to the extent that funds are borrowed generally,(i.e., without specifying any particular project) and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitilisation should be determined by applying a capitalisation rate to the expenditure on that asset. In the Company’s case, it has raised common loans for various projects in general and utilisation of loans was made progressively based on the construction activities undertaken at various project sites. Accordingly, it may be difficult to identify exact amount of borrowing funds utilised for a particular project. However, determining to what extent general borrowings have been used for a specific project, is a question of factand should be determined by exercising the best judgement considering various factors, for example, information related to cash inflows and outflows.
(viii) The Committee, therefore, has taken the view that to capitalise the borrowing costs, it is not sufficient that the funds are generally borrowed for meeting capital expenditure; it is also essential that the funds from those borrowings should be used for the purpose of obtaining a qualifying asset. The Committee notes from the Facts of the Case that there were general borrowings which were not even utilised for any project of the company during the period. Accordingly, the Committee is of the view that borrowing costs related to only utilised funds for the purpose of any project should be capitalised by applying weighted capitalisation rate as per paragraph 12 of AS 16, subject to the satisfaction of the conditions specified in paragraph 14 of AS 16 borrowing costs related to unutilised funds should be charged to the statement of profit and loss.
Therefore, the accounting treatment carried out by the company is correct. (Refer pages 1733 to 1737 of C.A. Journal, May 2013.)
3. Campus Placement Programme:
ICAI organised Campus Placement Programme for Chartered Accountants in various cities in February-March, 2013. Some of the important statistics given on Page 1807 of C.A. Journal for May, 2013 are as under:-
ICAI has suggested making it mandatory for companies to report foreign currency gains and losses separately in their financial statements. Companies will now have to separately state the impact of foreign exchange fluctuations in their balance sheets. This change will help a reader of the financial statement understand as to how much impact the foreign currency has had on the company. The move will help avoid divergence in accounting and bring more transparency in reporting of numbers. From now on, companies should show the Foreign Currency Monetary Item Translation Difference Account (FCMITDA) separately, under which they have to show foreign currency fluctuations “under the ‘Equity and Liabilities’ side of the balance sheet under the head ‘Reserve and Surplus’” These changes were approved by the Council. Further, ICAI has suggested changes in reporting of gains or losses with regard to hedging instruments related to long term foreign currency items. It is suggested that Exchange difference related to the hedging instrument obtained to cover the exchange risk on long term foreign currency monetary items should also be separately shown in the balance sheet.
(ii) ICAI Publications
(a) Education Material on Indian Accounting Standard (Ind AS) Revenue (P 1724)
(b) Technical Guide on Internal Audit of Textile Industry (P.1737)
(c) Education Material on Indian Accounting Standard (Ind AS) 108, Operating Segments (1744)
(d) Technical Guide on Internal Audit in Oil & Gas Refining and Marketing (Downstream) Enterprises (P.1764)
(e) Technical Guide on Business Control, Monitoring and Internal Audit of Construction Sector (P.1797)
(iii) Exposure Draft on Auditing Standards
Exposure Draft on “Assurance Engagement to Report on the compilation of Proforma Financial Information included in a Prospectus” (Page 1732 of CA Journal for May, 2013).
