A public limited company (P.C. Ltd.) 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. P.C. Ltd. has acquired 100% share capital of a Cyprus-based company
(ABC). During the same year, ABC acquired the entire issued share capital of a
UK-based company (XYZ). The funds for the acquisition of XYZ amounting to USD
1,922 million were provided by P.C. Ltd. to ABC with the intention to treat it
as share application money without entering into any formal agreement at the
time of remittances. Further, P.C. Ltd. has advanced USD 53 million to ABC for
XYZ’s business requirements.
Subsequently, P.C. Ltd. entered into a ‘Shareholders’
Investment Agreement’ with ABC. As per the terms of shareholders’ Investment
Agreement, ABC will issue preference/equity shares at a mutuality agreed premium
rate. The agreement makes clear the intention to convert the advance of USD
1,922 million given for acquisition of XYZ into preference/equity shares.
However, no concrete modalities regarding vital issues of the shares like,
nature of shares (i.e., equity/preference shares), number of shares, face
value and premium, etc., are firmed up till the balance-sheet date. No written
agreement is in place regarding the settlement of advance of USD 53 million
given for meeting XYZ’s business requirements. However, P.C. Ltd. intends to
convert this advance also into equity/preference shares and the advance is not
likely to be refunded in near future. As the shares are yet to be issued, the
amount of USD 1,975 paid by P.C. Ltd. to ABC has been shown as ‘Advance to ABC’
in Schedule, ‘Loans and Advances’ in the stand-alone financial statements.
As P.C. Ltd. intends to convert the advance of USD 1,975
(1,922 + 53) into equity/preference shares, the advance given to ABC, has been
considered as an extension to the net investment of P.C. Ltd. in ABC, which is a
non-integral foreign operation. Therefore, the net investment in ABC has been
revalued and accounted for in accordance with the requirements of Paragraph 15
and 16 of Accounting Standard (AS) 11. P.C. Ltd. has revalued the advance of USD
1,975 million at the foreign exchange rate at the year-end rate. The credit for
the same amount has been given to ‘Foreign Exchange Translation Reserve’.
However, the C&AG while carrying out their review
u/s.619(3)(b) objected to the above accounting treatment of showing the amount
of USD 1,922 million paid to ABC towards financing acquisition cost of XYZ as
‘Advance’, as in their view, the amount should be shown as ‘Investment (Share
Application Money pending allotment)’ and, therefore should not be revalued in
accordance with Accounting Standard (AS) 13. Further, the C&AG questioned the
credit of the amount arising on revaluation of USD 53 million to ‘Foreign
Exchange Translation Reserve’ instead of taking it to the profit and loss
account, as in their view, the foreign exchange revaluation gain is of revenue
nature.
Query :
In view of the above stated facts, P.C. Ltd. sought the
opinion of the Expert Advisory Committee (EAC) on the appropriate accounting
treatment of advances so paid and treatment of foreign exchange gain/loss
arising on revaluation thereof.
EAC opinion :
EAC has taken the view that accounting treatment in the case
of P.C. Ltd. would depend upon whether the funds advanced to ABC for acquisition
of shares in XYZ and for meeting XYZ’s business requirements can be regarded as
a monetary item or as a non-monetary item. The Committee noted the Accounting
Standard (AS) 11 and came to the conclusion that shareholder’s investment
agreement with ABC only contains the intention to convert the said advance into
preference/equity shares, and no concrete modalities regarding nature of shares
(i.e., equity/preference shares), number of shares, face value, premium,
etc., have been decided till the balance-sheet date. The EAC noted that in
respect of an advance of USD 53 million P.C. Ltd. intends to convert this
advance also into equity/preference shares. However, no agreement in respect
thereof has been entered into or any modality for such conversion has been
decided till the balance-sheet date. Accordingly, the EAC is of the view that
both the advances are of the nature of monetary items. Further, the EAC is also
of the view that accounting treatment followed by the company for the treatment
of the advance of USD 1,975, revaluation of advances and credit of foreign
exchange revaluation gain to Foreign Exchange Translation Reserve is
appropriate.
(Refer pages 1248 to 1252 of C.A. Journal of February, 2011)
2. Our new President and Vice-President :
Shri G. Ramaswamy from Coimbatore has been elected as
President of ICAI on 12th February. Shri Jaydeep Shah from Nagpur has been
elected as Vice-President of ICAI on 12th February. Our greetings and best
wishes to both of them. We wish them a successful term of office in 2011-12.
3. New Chairman of NACAS :
Shri M. M. Chitale, Mumbai, former President of ICAI, has
been appointed as Chairman of National Advisory Committee on Accounting
Standards in place of Shri Y. H. Malegam w.e.f. 31-1-2011 for one year. This
committee is also reconstituted. We wish to convey our greetings and best wishes
to Shri Chitale and wish him and his colleagues a successful term of office in
2011-12.
4. New Minister for Corporate Affairs :
Shri Murli Deora from Mumbai has taken charge as the new
Minister of Corporate Affairs on 20-1-2011. He is known to be a seasonal
industrialist, a proactive social worker and a soft but determined leader. His
Ministry oversees the affairs of ICAI. Our greetings and best wishes to Shri
Deora. We wish him a successful term of office. (Page 1181)
5. MoU with Canada C.A. Institute :
ICAI has signed a MoU with Canadian Institute of Chartered
Accountants for reciprocal membership arrangements. This MoU will facilitate
mobility of members across the borders and further strengthen the ties between
India and Canada. The MoU will establish closer working linkages as well as
provide recognition for members of the two institutes in the respective
countries. (Press Note of ICAI dated 7-2-2011)
6. ICAI News :
(Note : Page Nos. given below are from C.A. Journal of
February, 2011)
(i) Recognition for PhD Courses for CAs :
Institute of Management, Kozhikode (Kerala) and National Law
School of India, Bangalore, have extended a facility to our members to pursue
Fellow Programme i.e., PhD programme. (Page 1149)
(ii) Arrangement with Microsoft :
Special pricing (at very low rates) has been worked out with Microsoft for ICAI members and students. This is a part of the Academic Licensing for providing the latest edition of MS Windows and MS Office. (Page 1149)
iii) Significant achievements and major decisions by Council of ICAI in 2010:
b) Details of some significant achievements by ICAI since February, 2010, are given on pages 1152 to 1168.
a) Details of major Council decisions since February, 2010, are given on pages 1170 to 1180.
iv) ICAI International Conference
International Conference on Role of Accountancy Profession in Sustained Economic Growth was organised by ICAI from 4th to 6th January, 2011, New Delhi. Highlights of the conference proceedings are given on pages 1186 to 1196.
v) Tax issues from conveyance of IFRS with accounting standards:
ICAI has drafted 35 accounting standards after the convergence of IFRS and sent it to the Government for Notification under the Companies Act. (Refer Page 1152). A study group comprising some Council Members and representatives of CBDT was constituted for study of tax issues arising out of convergence of existing accounting standards with IFRC. This Group has prepared a position paper identifying these tax issues and making certain suggestions for amendments in the Income-tax Act and the Companies Act. This position paper is published on pages 1254 to 1263.
(vi) New books released by ICAI:
(a) Technical Guide on Audit of NBFCs.
(b) Practical Approach to General Insurance Management.
(c) Social Audit of Public Money.
(d) Excellence in Financial Reporting Illustrative Guide to Presentation and Disclosures.
(e) Drafting, Conveyancing, Registration and Stamping of Commercial and other Documents.
(f) Changing Times in Government Accounting — A Status Report.
(g) Study on Co-ordination of Internal Auditor with Functional Heads.
(vii) New branches and buildings of ICAI:
The following new branches and buildings at branches have been opened by ICAI:
(a) Latur branch of WIRC.
(b) Ganganagar branch of CIRC.
(c) New building at Bhilai branch of CIRC.
(d) New building at Sangrur branch of NIRC.
(Refer Page 1149)
