ICAI And Its Members

The Ethical Standards Board of ICAI has discussed some ethical issues on pages 554 and 556 of the CA Journal of October, 2010, as under :

(i) Can a Member share profits with the widow of his deceased partner?

    Ans. : When there are two or more partners and one of them dies, the widow of the deceased partner can continue to receive a share of the profit of the firm. A legal representative, say, widow of a deceased partner, would be entitled to share the profits only where the partnership agreement contains a provision that on the death of the partner, his widow or legal representative would be entitled to such payment by way of sharing of fees or otherwise for the specified period.

(ii) Can there be sharing of fees between the widow or the legal representative of the proprietor of a single member firm and the purchaser of the goodwill of the firm on the death of the sole proprietor of the firm ?

    Ans. : There could not be any sharing of fees between the widow or the legal representative of the proprietor of a single member firm and the purchaser of the goodwill of the firm on the death of the sole proprietor of the firm. Payment of goodwill to the widow or legal representative is permissible in such cases and to enable such payments to be made in installments, the agreement of the sale of goodwill should contain such a provision. These payments, even if they are spread over the specified period, should not be linked up with participation in the earnings of the firm.

(iii) Can the details of a student passing examination be published in the local press ?

    Ans. : It is usual for local papers to publish details of the examination success of local candidates. Some biographical information is often included. The candidate’s name and address, school and local background, examination passed with details of any prize or place gained, the name of the principal, firm and town in which the principal practices may be published.

(iv) Can a member act as Tax Auditor and Internal Auditor of an entity ?

    Ans. : The Council has decided that the Tax Auditor cannot act as Internal Auditor or vice versa for the same financial year.

(v) Can a concurrent auditor of a bank undertake the assignment of quarterly review of the same bank?

    Ans. : The concurrent audit and the assignment of quarterly review of the same entity cannot be undertaken simultaneously as the concurrent audit is a kind of internal audit and the quarterly review is a kind of statutory audit. It is prohibited in terms of the ‘Guidance Note on Independence of Auditors.’

(vi) Is a member holding certificate of practice entitled to own agricultural land and continue agricultural activity ?

    Ans. : Member holding certificate of practice can own and hold agricultural land and continue agricultural activity through hired labour.

2. Basis of calculation of future cash flows — EAC Opinion :

(i) Facts :

    A public sector company engaged in the business of mining of bauxite, manufacturing of alumina and aluminum as well as generation of power at the captive power plant for use of smelter plant. At alumina refinery, the company has set up two value added plants for (i) special grade hydrate and (ii) special grade alumina (SGA). Both the units have been identified as cash generating units for the purpose of Accounting Standard (AS) 28, Impairment of Assets.

    The company has stated that estimate of future cash flows over the useful life of the SGA plant, i.e., up to the financial year 2022-23, was made in line with the provisions of paragraphs 26(a), 26(b), 27, 28, 29, 30, 31(a), 31(b) and 31(c) of the AS-28. For the SGA plant, calcined alumina, which is internally transferred, is the only raw material. While calculating the cash flows, cost or production of calcined alumina was considered as the cost of raw material.

    During the course of scrutiny/checking of cash flow statement, C&AG auditors agreed to each and every assumption taken, except the cost of raw materials. In the opinion of the C&AG, auditors, market price of calcined alumina should have been taken as the cost of raw material instead of cost of production.

(ii) Query :

    Based on the facts stated above, the opinion of the Expert Advisory Committee has been sought by the company on the issue as to whether the raw materials’ cost (internally transferred) should be taken at ‘cost of production’ or ‘market price’ for the purpose of calculating future cash flows for ascertaining impairment as per AS-28 ?

    iii) EAC opinion:

The Committee is of the view that paragraph 31 of AS- 28 lays down the composition of the estimates of future cash flows. Paragraph 31(b) of AS-28 only lays down that the projections of cash flows for an asset; should include cash outflows required to generate cash inflows. The paragraph further requires that cash outflows should include, among other expenses, overheads and other related charges that can be directly attributed or allocated on a reasonable and consistent basis to the asset.

The Committee is of the view that, on the other hand, paragraph 68 of AS-28 lays down the payments for identification of the cash-generating unit in case when an active market exists for the output produced by the asset or a group of assets even if the output is used internally. This paragraph requires that in such a situation, that is, when an active market exists for the output of an asset or a group of assets which is used internally, that asset or group of assets should be identified as a separate cash generating unit. This paragraph further requires that in such a situation, it is the management’s best estimate for future market price of the output that should be used for determining the cash inflows even from internal use of the output. Similarly, for determining the cash outflows of the cash generating unit that uses the output of this CGU as its raw material, it is the management’s best estimate of future market prices of the product that should be used for determining cash outflows.

The Committee is of the view that paragraph 31(b) is a general paragraph which details with what cash outflows should be taken into account while determining future cash flows; whereas, paragraph of AS-28 contains specific requirements with respect to, inter alia, the price at which the raw material which is transferred internally, should be taken for the purpose of determining cash outflows. Thus, in the view of the Committee, there is no contradiction between paragraphs 31 and 68 of AS-28.

On the basis of the above, the Committee is of the opinion that for the purpose of calculating future cash flows for determining impairment as per AS-28, the cost of the internally transferred raw material should be taken at the management’s best estimate of future market prices of the output (raw material).

(Refer pages 575 to 577 of C.A. Journal for October, 2010)

    3. Interview with Shri Mukesh Ambani:
Shri Mukesh Ambani gave an exclusive interview to the C.A. Journal, which is published on pages 578-580 of C.A. Journal of October, 2010. Some of the answers given by him are as under:

    Would you like to say something about the chartered accountancy profession? How is your experience with chartered accountants?? Would you like to give any feedback on their knowledge, skills, training, etc.
Ans.: Chartered accountancy as a profession has very effectively helped business, because it has created high standards of accounting and rigorous systems that only allow the best to get certification. At RIL, we have a large number of chartered accountants who have made significant contribution to the organisation’s success and corporate governance.

    ii) Would you like to give any message to the members of the chartered accountancy profession to inspire and enable them to fully tap opportunities and face the ever-changing dynamic world of business?
Ans.: I think chartered accountancy can benefit by expanding its horizons to encompass global standards prescribed by well-renowned courses such as the CPA, especially because our best students are brighter, can work harder and are mathematically inclined. I would also like to encourage them to maintain excellence.

    iii)What are the areas ICAI and Reliance can jointly work for development of chartered accountancy as a profession with a focus on the economical and social development of our country?

Ans.: I believe ICAI can help evolve a standard template with the help of leading corporate houses to ensure minimum standards of corporate governance. An institution like ICAI can also align with our future initiatives in education to take the profession to the smaller towns of India.

    4. Scheme for Secondment of Articled Trainees:

    i) A Principal may, with the consent of the articled trainee, second from time to time the articled trainee to other member or members with a view to provide the articled trainee the opportunity of gaining practical experience in areas where the Principal may not be in a position to provide the same.

    ii) The articled trainee shall be seconded only to a member who is entitled to train one or more articled trainees in his own right or to a member in industry who is entitled to train one or more industrial trainees.

    vi) During the period of secondment, the Principal shall pay the stipend as provided under the Chartered Accountants’ Regulations.

(C.A. Student Journal for October, 2010 — page 21)

    5. ICAI News:

(Note: Page Nos. given below are from the C.A. Journal of October, 2010)

    i) New ICAI Chapter in UAE:

ICAI has added the 22nd International Chapter at RAS AL KHAIMAH, UAE, (page 546).

    ii) International Conference on Accountancy:
ICAI is organising the International Conference on Accounting at New Delhi from 4th to 6th January, 2011. Many delegates from the Asia-Pacific Region will attend this conference. Subjects such as Financial Re-engineering, Governance, Harmonisation of Standards, Issues relating to SMP Accountants, and Millennium Developmental Goals, etc. will be discussed at the conference. (page 547).

    iii) Group to Resolve Dispute for Members:

A new group has been constituted by ICAI to examine the matter of development of an alternate dispute resolution machinery (arbitrator) for dealing with disputes of member v/s member and member v/s student and make recommendations to the Central Council (page 549).

    iv) Unique Code Numbers:

It is reported that ICAI has decided to introduce a Unique Code Number (UCN) for use of members and C.A. firms. It is believed that use of UCN will check the increasing instances of forged attestations of certificates issued by our members and CA firms. According to ICAI President, there are many instances reported where the financial statements produced before tax authorities, banks, etc. are different from those certified by our members and CA firms. To curb this practice it is proposed that ICAI will issue UCN which will have to be used by the members and CA firms. (Source: Business Standard of 7-10-2010).

    v) New publications of ICAI:

The following new publications have been issued by ICAI (pages 663 & 666):
    a)Compendium of Standards and Statements on Auditing (Vol. I & II).
    b) Compendium of Guidance Notes on Auditing (Vol. III) as on 1-7-2010.
    c) Technical Guide on Internal Audit of BPO Industries.
    d) Technical Guide to Cenvat Credit.