ICAI And Its Members

    As reported in the earlier issues, the above Bill is pending before the Parliament. The Standing Committee on Finance has submitted its report to the Parliament on 31-10-2010. Several suggestions have been made by this Committee and the Bill is likely to be modified and discussed in the Parliament during the coming few months. Some important changes relating to appointment and qualifications of directors are suggested in the Bill. These are contained in clauses 132-153 of the Bill. The changes suggested are as under:

    (i) Clause 132 of the Bill provides that the minimum number of directors shall be three in the case of a public company and two in the case of a private company. As regards one-person company, the minimum number shall be one. It is, further, provided that the maximum number of directors in any company cannot exceed 15, excluding directors nominated by the lending institutions. Further, at least one director should be a resident in India. The company will be entitled to increase the number of directors beyond 15 after passing a special resolution of the shareholders at the general meeting.

    (ii) In the case of a listed company, having such amount of paid-up share capital as may be prescribed, the requirement will be that it shall have atleast 1/3rd of the total number of directors as independent directors. The Central Government may prescribe the number of independent directors in case of other public companies and subsidiaries of any public company.

    (iii) The term ‘Independent Director’ has been defined in clause 132(5). According to this definition, a nominee director is not to be treated as an independent director. The other conditions for an independent director are as under:

    (a) The director should be a person of integrity and should possess relevant expertise and experience; or

    (b) The director or his/her relatives —

•  should not have pecuniary relationship or transaction with the company, its holding, subsidiary or associate company or promotors amounting to 2% or more of its gross turnover or total income during the two immediately preceeding financial years or during the current financial year.

•  should not hold or should not have held any senior management position or as key managerial personnel or as employee of the company in any three immediately preceeding relevant financial years.

•  is or has been employee or a partner, in any of the three immediately preceeding financial years, of a firm of auditors, company secretaries or cost auditors of the company or its associates.

•  is or has been employee or a partner of a legal or consultancy firm which had in any of the three immediately preceeding financial years transaction with the company or its associates amounting to 10% or more of the gross turnover of the firm.

• holds, in aggregate, 2% or more of the total voting power of the company.

•  he is a chief executive or director of any non-profit organisation that receives 25% or more of its income from the company or its associate or holds 2% of more of the total voting power of the company, or

(c) Should possess such qualifications as may be prescribed.

(iv) The role, duties and functions of an independent director will be prescribed by the Central Government by way of rules.

(v) The independent directors shall not be entitled to any remuneration other than sitting fees, reimbursement of expenses, for participation of board and other meetings and profit-related commission, stock option as may be approved by the shareholders.

(vi) An independent director shall not have a tenure exceeding, in the aggregate, a period of six consecutive years on the board of a company. However, after the lapse of three years, he can be appointed as an independent director for up to six years provided that no such director can have or shall have more than two tenures as independent director in any company.

(vii) In clause 146, it is provided that no person shall hold office as director, including any alternate directorship, in more than 10 public limited companies at the same time. Further, it is also provided that, out of the above, maximum number of listed companies in which such a person can be appointed as a director shall not exceed 5.

(viii) Clauses 132-153 contain other provisions relating to mandatory requirement of obtaining DIN, appointment of additional directors, disqualification of directors, duties of directors, their resignation, removal, etc. These provisions are more or less the same as in the existing Companies Act.

2. Treatment of capital expenditure on assets not owned by the company:

    A Public sector undertaking registered under the Companies Act, 1956, is engaged in refining and marketing of petroleum products. When a new project by setting up of new refinery is undertaken by the company, it has to incur expenditure on the construction/development of certain assets, like electricity transmission lines, railway sliding, roads, culverts, bridges, oil jetty, etc., in order to facilitate construction of project and subsequently to facilitate its operations. The ownership of such assets (enabling assets) as well as the land on which these assets are situated does not vest with the company.

    The existing accounting policy of the company in respect to such ‘enabling assets’ is as under:

    (a) Fixed assets which are owned by the company, but built on land not belonging to the company, are treated as fixed assets belonging to the company.

(b)    As regards fixed assets constructed, which are not owned by the company, on land not belonging to the company, the expenditure incurred on the constructions of such assets has been classified as ‘Capital Expenditure’ in the balance sheet indicating appropriately, the nature of the expenditure including the fact that the assets are not owned by the company, and after commencement of commercial operations, the same is written off to the profit and loss account.

However, the statutory auditors of the company are of the opinion that existing accounting treatment of such ‘enabling assets’ followed by the company does not appear to be correct. According to them, (a) expenditure should be debited to Capital Work In Progress (CWIP) till the enabling asset is ready for use. (b) On completion of the enabling asset, the same should be capitalised. (c) Such capital expenditure should be reflected as ‘Capital Expenditure on Assets not owned by the Company’. (d) Such capital expenditure should be amortised over the period of its utility, but not exceeding 5 years and (e) Amount amortised should be treated as expenditure during the construction period till the completion of the project, for which the enabling asset was originally created. After the completion of the project, the amortised amount is to be charged to the profit and loss account every year for the balance period of its utility.

Query:

On these facts, the company has sought the opinion of the EAC whether the accounting treatment followed by the company in respect of expenditure incurred on ‘enabling assets’ as CWIP during construction period of the project and charging off the same to the revenue in the year of completion of the project is correct?

EAC opinion:

After considering paragraphs 49 & 88 of the ‘Framework for the Preparation and Presentation of Financial Statements’ the Committee has taken the view that expenditure incurred by an enterprise cannot be recognised as an asset as resource is not controlled by the enterprise. An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise. Further, the Committee has taken the view that an indicator of control of an item of fixed asset would be that the entity can restrict the access of others to the benefit derived from the asset. From the facts of the case it is evident that the ownership of the ‘enabling assets’ does not vest with the company. The assets are available for general public use. Although the company is entitled to use these assets for the purpose of completing its own projects and subsequently for operational purposes, it has no say on the use of such assets by others. Thus, ‘enabling assets’ are not resources controlled by the company and, therefore, the expenditure incurred by the company on such ‘enabling assets’ can not be capitalised as assets either tangible or intangible considering AS-10 and AS-26. Further, the expenditure incurred on ‘enabling assets’ cannot be considered as directly attributable to such assets and therefore the same can not be capitalised.

In view of this, the Committee has taken the view that expenditure incurred on ‘enabling assets’ should be expensed and charged to profit and loss account of the period in which these are incurred.

As far as accounting treatment given by the company in respect of such ‘enabling assets’ which are still lying as CWIP, the Committee has taken the view that the same is an error committed in the prior years by the company, which should be rectified in the financial statements and disclosed as a ‘prior period items’ of the period in which such rectification is carried out in accordance with the requirements of Accounting Standard (AS) 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”.(Pages 1040 to 1045 of C.A. Journal of January, 2011)

  3.  ICAI News:

  (ii)  Certificate course on valuation:
It is reported that 800 members of our Institute have been registered for certificate course on ‘Valuation’. Examinations are being held in batches at various places all over India. (Page 1001)

 (iii)  Suggested answers for examination members:
ICAI has hosted suggested answers for the examinations held in November, 2010 on its website. It is reported that the entire study material for the final course has been revised/modified substantially. This will be available to the students in the month of January through their respective branches/regions. (Page 1002)

 (iv)  Bank branch auditors’ panel for NABARD:
Bank Branch Auditors’ Panel by the Professional Development Committee of ICAI has prepared a Bank Branch Auditors’ Panel for the year 2010-11 and submitted the same to NABARD for appointment of statutory auditors for regional rural bank and state/district central co-operative banks. (Page 1002)
 
(v)  Empanelment of CA firms with C & AG for   2011-12:
C & AG has invited online applications from firms of CAs who wish to empanel for the year 2011-12 for appointment as auditors of Government companies/corporations. Format of the application is available on the website : www.cag.gov.in CA firms can apply or update the data showing status of the firms as on 1-1-2011. This application can be submitted by 31-3-2011. Any changes in the constitution of the firm occuring from 1-1-2011 onwards should continue to be updated by the CA firm in the website which will be available through out the year. (Page 1132)

(vi)    New publications of ICAI:

(a)    ICAI has published Compendium of Standards on Internal Audit. (As on 1-10-2010)

(b)    ICAI has also published Compendium of Opin-ions given by the Expert Advisory Committee (Vol. XXVIII). (Page 1132)

(vii)    Grievance cell at WIRC:

A grievance cell has been formed to address issues of members and students related to administrative matters. Members can send the issues by e-mail to grievance@wirc-icai.org or in writing to WIRC. The members of the Grievance Cell are Chairman, Secretary, Shruti Shah, Neel Majithia, (RCMs) and Students Counsellor.

(viii)    Extension of CPE Block:

Members may note that ICAI has decided to extend the CPE Block periof of 3 years ending on 31st December, 2010, by three months, i.e., to 31st March, 2011.

(ix) Recognition for Doctoral programme:

IIM Kozhikode & IIM Shillong has recognised Chartered Accountancy qualification as an eligibility to pursue their Doctoral programme i.e., Fellow Programme in Management.

(x) Placement programme:

ICAI has recently organised a special placement programme through video conferencing mode for the organisations functioning in GCC/Middle East countries.

(xi) Arbitration course:

ICAI has created a panel of Arbitrators through the certificate course on Arbitration.