As reported in the last
issue, the above Bill is pending before the Parliament. The Standing Committee
for Finance has submitted its report on 9-9-2009. Several suggestions have been
made by this Committee and the Bill is likely to be modified on this basis and
discussed in the Parliament during the months of February to May, 2011. Some
important changes relating to accounts and audit were discussed in the last
issue of BCA Journal. Some of the other amendments affecting Chartered
Accountants suggested in the Bill are as under.
(i) Clause 422(1) of the
Bill provides that no association or partnership consisting of more than such
number, not exceeding 100, as may be prescribed by Rules, shall be formed for
the purpose of carrying on any business unless it is registered as a company. It
may be noted that under clause 422(2)(b) it is provided that the above
restriction shall not apply to a partnership formed by professionals. Therefore,
Chartered Accountants and other professionals will be able to form a partnership
firm with unlimited number of partners.
(ii) Clauses 368 to 395 of
the Bill provide for the constitution of ‘National Company Law Tribunal’ and
‘National Company Law Appellate Tribunal’ and the functions and procedure to be
followed by these two bodies. Under the scheme of the Bill, existing powers of
the High Courts under the Companies Act will now vest in the Tribunal. Each
Bench of the Tribunal or Appellate Tribunal will consist of two categories of
members. One will be a judicial member and the other a technical member.
President of the Tribunal shall be a sitting or retired Judge of a High Court.
The chairperson of the Appellate Tribunal shall be a sitting or retired Judge of
the Supreme Court or Chief Justice of a High Court. In the list of persons who
can be a technical members of the Tribunal or the Appellate Tribunal it is
provided that a Chartered Accountant in practice for 15 years or more can be
appointed as a technical member of the Tribunal or the Appellate Tribunal.
(iii) Clause 393 of the Bill
also provides that a Chartered Accountant in practice can appear before the
Tribunal or the Appellate Tribunal and argue the case of his client.
(iv) Clause 250 of the Bill
provides that the Central Government shall maintain a panel consisting of names
of Chartered Accountants, Advocates, Company Secretaries, etc. for appointment
as Company Liquidators or Provisional Liquidators. For the purpose of winding up
of a company by the Tribunal, a Company Liquidator who is on the above panel
will have to be appointed. This provision will enable Chartered Accountants in
practice to work as Company Liquidators.
From the above provisions it
will be noted that if the Companies Bill, 2009 is enacted with the above
clauses, our members will be able to render their professional services in the
above new fields.
2.
Accounting treatment of overlift/underlift
quantity of crude oil :
Facts :
A public limited company
(Company) which is a wholly-owned subsidiary of a listed government company, is
in the business of exploration and production of oil and gas and other
hydrocarbon-related activities outside India. Usually, the legal regimes
applicable in most of the counties provide that the ownership of mineral
resources (hydrocarbons) is with respective governments. Accordingly, the host
governments grant the rights to explore, develop and produce hydrocarbons in
certain specified geographical areas within their territories (Rights) to the
companies on some equitable consideration under various regimes. The activities
of the Company, thus, include securing such Rights and then to explore, develop
and produce hydrocarbons. Such Rights are secured either on a 100% basis,
wherein the Company or its affiliates themselves take the entire risks and
rewards of such Rights or in consortium with other participants where the joint
venture participants share the risks and rewards in certain agreed proportions.
The Company is a participant
in a production sharing agreement along with other companies (Consortium) and
the government of a foreign country (State) in respect of certain geographical
area.
The Company is accounting
for the overlift/underlift quantity of its basic entitlement as per its declared
accounting policy. Following the accounting policy, the Company reduced the
sales arrived at by multiplying overlift quantity by the sale price of crude oil
realised by the Company for its last sold cargo during March 2009 and created
liability for the same. In case of underlift as on the balance sheet date, the
Company would have treated the underlift quantity as inventory of the Company
and would have valued it in accordance with the requirements of Accounting
Standard (AS) 2, ‘Valuation of Inventories’ at cost or net realisable value,
whichever is lower.
However, C&AG auditors while
carrying out their review for the financial year 2008-09 objected to the
accounting for overlift quantity as liability and contended that the Company
should treat overlift quantity as its own share of production and should have
booked sales for the overlift quantity simultaneously recognising expenditure on
the basis of its recent cost figures.
Query :
Hence, the Company sought
the opinion of the Expert Advisor Committee of ICAI on the appropriate
accounting treatment of overlift/underlift quantity of crude oil by the Company,
i.e., whether the accounting policy of the Company in recognising
overlift quantity as liability and underlift quantity as inventory is
appropriate and whether the accounting treatment carried out by the Company in
respect of overlift quantity of crude oil by recognising the same as liability
at recent sales price of the crude oil realised by the Company is appropriate ?
Opinion :
After considering the term ‘revenue’ as provided by Accounting Standard (AS) 9, ‘Revenue Recogni-tion’, the Committee expressed the view that the total amount of consideration arising from the sale of crude oil should be recognised as revenue.
Further, after considering paragraph 10 of Accounting Standard (AS) 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, the Committee has taken the view that the overlift of crude oil gives rise to an obligation on the Company to transfer future economic benefits. Accordingly, a liability should be provided for by the Company by way of charge to the profit and loss account for overlift quantity.
Furthermore, the amount of provision for the liability in respect of overlift quantity should be determined on the basis of the best estimate of the expenditure required to settle the present obligation at the balance sheet date as per the requirements of paragraph 35 of AS-29.
As regards underlift situation, the Committee has taken the view that to the extent it is the settlement of an overlift situation of the earlier periods, it should be recognised by debiting the liability provided for under the overlift situation and crediting/reducing the Company’s proportion-ate share in the production cost. In respect of other underlift situations, the Committee has noted that the Framework for the Preparation and Pre-sentation of Financial Statements, issued by ICAI provides that “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 an enterprise”. Accordingly, the Committee expressed the view that an underlift represents a right to future economic benefit through entitlement to receive equivalent production in the future and is therefore, an asset.
Since in the present case, the Company is charged for the proportionate share of production cost as per its basic entitlement, but the quantity of crude oil lifted is less than its basis entitlement, the amount paid in excess is ‘prepaid expense’. The Committee has taken the view that under the underlift situation, the Company should recognise a pre-paid expense by crediting its proportionate share of production cost as per the joint operating agreement/production sharing agreement.
On the basis of the above, the Committee expressed the opinion that the accounting policy of the Company in recognising overlift quantity as liability is appropriate, however, recognition of liability by reversing the sales/revenue of the Company at the recent sales price of the crude oil is not appropriate. The accounting policy of recognising the underlift quantity as inventory is
also not appropriate.
3. 300th Meeting of Council of ICAI held on 24-11-2010:
Some of the important decisions taken by the Council at the above meeting are as under:
(i) Formulation of guidelines for revival of derecognised Study Circles: A Study Circle which was earlier derecognised by the Council can be revived by the Continuing Professional Education Committee, subject to the compliance with certain norms to be specified in this regard.
(ii) Recognition of fair value changes in investment property: The ASB has decided that instead of recognising the changes in fair value in investment property in profit or loss, where an entity adopts the option of measuring investment property at fair value as per the draft AS-37 dealing with ‘Investment Property’, the same should be recognised in other comprehensive income.
(iii) To ensure professional competence of our members: The Council decided that where there has been a gap of 5 or more years between the removal of name and application of restoration of the name, if the member applies for Certificate of Practice, he should undergo a specified refresher course of a duration of 30 hours in the modules to be developed by Board of Studies, either in physical form during weekends or in the online format. Alternatively, such members could attend CPE programmes and earn 30 CPE hours before the Certificate of Practice is restored/granted.
(iv) Persons who have not enrolled as members: For the persons who have passed the final examination and become eligible for enrolment as a member, but have not applied for membership within 5 years from the date of their becoming eligible, should undergo the aforesaid refresher course for getting enrolled as a member.
(v) Modalities to be recommended for holding the office of Office Bearers: For the year 2011-12 and 2012-13 for those branches where the majority of members of Managing Committee have held that office of Chairman in earlier years, the Council observed that holding of post of Chairman of a branch again is not acceptable either from good governance point of view or from ethical point of view. Therefore, the Council has decided that the Chairman of a branch after demitting office should not seek re-election for or hold the post of the Chairman of the said branch in the year 2010-11 and 2012-13.
(vi) Common Proficiency Test: It is decided that candidate shall have to obtain at one sitting, a minimum of 30% marks (out of maximum marks specified by the Council for each Section) and a minimum of 50% marks in the aggregate of all the Sections, subject to the principle of negative marking, in a manner as may be specified by the Council from time to time.
(vii) Revised Final Study Material available by January 2011: The Board of Studies had released the revised final study material which has been updated and modified. Entire study material along with Practice Manuals would be available at all branches of ICAI by January 2011.
(Refer pages 836-837 of CA Journal for December, 2010)
(viii) In case of reconstitution of a firm, wherever Form 18 duly signed by the remaining partners and the resignation letter of outgoing partner(s) is received, the office will take such reconstitution on record as per the current practice.
(ix) Wherever the firm is ‘at will’ as per the deed of partnership and the retirement of a partner(s) is informed and Form 18, accompanied by a certified copy of partnership deed, can be submitted duly signed by the remaining/surviving partners of the firm. In such a case, the fact of such retirement will be informed to the outgoing partner(s) concerned giving a notice by recorded delivery mode of 14 days to inform the factual position. In case no response is received, the reconstitution of the firm will be taken on record. If an objection is received, the reconstitution of the firm will not be taken on record and the firm as well as the outgoing partner(s) will be informed about the option of availing the forum of Dispute Resolution Mechanism of the Institute.
(x) Wherever the firm is ‘at will’ as per the deed of partnership and the partnership deed has vested in the Managing Partner of the firm to perform certain specified acts which includes reconstitution of firm on his own he can, in pursuance of such authority, inform the Institute and submit Form 18 accompanied by a certified copy of partnership deed, duly signed by the re-maining/surviving partners of the firm. The fact of such Form 18 specifying the act will be informed to the outgoing partner(s) concerned giving a notice by recorded delivery mode of 14 days to inform the factual position. In case no response or confirmation is received, the reconstitution of the firm will be taken on record. If objection is received, the reconstitution of the firm will still be taken on record and the aggrieved members can move the Dispute Resolution Mechanism.
(Refer page 842 of CA Journal for December, 2010)
4. Dispute Resolution Mechanism:
The Council of ICAI has announced the development of Alternate Dispute Resolution Mechanism (Arbitrator) for dealing with disputes of (i) Member v. Member and (ii) Member v. Student.
5. ICAI News:
(Note?: Page Nos. given below are from the CA Journal for December, 2010)
(i) Discrepancies noticed by Peer Reviewers during Review Process:
Peer Review is directed towards maintenance and enhancement of quality attestation services and to provide guidance to improve their performance and adhere to various statutory and the other regulatory requirements. Some of the discrepancies noticed during the course of Peer Review of records of some of the members have been reported on page 968.
(ii) New Publication of ICAI:
(a) Background Material for Audit Training Work-shops and Seminars (A manual of Presentations on Standards on Auditing and other Engagement Standards) has been published by the Institute.
(page 972)
(b) Revised Guidelines and FAQs for Training of Articled Assistants outside India. (page 973)
(iii) Empanelment with C & AG:
Applications for empanelment with C & AG by firms of Chartered Accountants for 2011-12 can be made after 1-1-2011. Details published on page 972.
(iv) Multipurpose Empanelment Forms:
Details about Multipurpose Empanelment Forms (Including Bank Branch Auditor’s Empanelment) have been published on pages 975-977.
