Month: June

Presently the monthly journal of the Institute is delivered only at the professional address registered with the Institute. However, with a view to ensuring timely delivery of the journal to members and to enable them to read it at their convenience, ICAI has decided to give an option to the members to get their copy of journal at the residential address, if they so desire. All those members who are desirous of getting the journal at the residential address may send  a request  in writing  (page  1807).

    2. Non-compliance with reporting obligations:

Financial Reporting Review Board (FRRB) has observed some discrepancies in compliance with Accounting Standards in published Financial Statements of some of the companies. In brief some of the important observations of the committee are as under. Members may note these observations.

    i) AS 1 — Disclosure of Accounting Policies:

    a) Certain enterprises merely state in their accounting policy relating to revenue recognition that the revenue has been recognised on the basis as stipulated under AS-9, Revenue Recognition. Such disclosure cannot be considered as adequate disclosure under AS-1. The accounting policy as adopted by the enterprise with respect to timing of recognition of revenue arising from sales revenue, interest income, royalty income and dividend income should be considered as one of the most important accounting policies for any organisation and it should be disclosed separately.

    b) Paragraph 24 of the AS-1 requires that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. The financial statements of the enterprises provide a detailed note on accounting policies as adopted by them. However, they often omit to disclose accounting policies with regard to the borrowing costs, valuation of inventories, accounting for investments, impairment of assets, provisions, contingent liabilities and contingent assets. It was felt that enterprises normally, borrow funds, hold inventories as well as investments and also possess certain assets which may be subject to impairment. Further, there is always a need to carry certain provision to meet their future liabilities. Accordingly, subject to circumstances, enterprises are expected to also disclose the accounting policies as adopted by them with regard to borrowing costs, valuation of inventories, accounting for investments, impairment of assets and provisions, contingent liabilities and contingent assets.

    ii) AS-2 — Valuation of inventories:
Some enterprises recognise the customs duty on inventory as and when the goods are cleared from customs warehouse. As such, no provision for customs duty is made on the goods lying in the warehouse. It is contrary to the requirement of the AS-2. It may be noted that as per paragraph 6 of the AS-2, the cost of inventories should comprise all costs of purchases, costs of conversion and other costs incurred in brining the inventories to their present location and condition. Since the customs duty is a cost incurred in bringing the goods to its present location and condition, therefore, the liability to pay such duty should be recognised as and when the goods enter the territorial waters of the country. (Page 1871)

    3. Deferred tax assets — What is virtual certainty?

Expert Advisory Committee (EAC) has given the following opinion on this subject on Pages 1755-1757.

    i) Facts:

A public sector company is engaged in construction of ships and ship repair activities. The company has an accumulated loss of Rs.847.42 crore as on 1-4-2008 and a deferred tax asset of Rs.102.36 crore. As per the Income-tax Returns filed by the company and income-tax assessments, the amount of unabsorbed depreciation and carried forward losses of the company is Rs.255.51 crore. The company has also realised deferred tax asset to the extent of Rs.6.66 crore in the financial year 2007-08.

The Auditors have taken the view that there is no virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which deferred tax assets (DTA) can be realised. The company has given several reasons to support its stand that sufficient income will be available in future years against which a DTA can be adjusted.

    ii) Query:

The company referred the following query to EAC for its opinion.

The querist has sought the opinion of the Expert Advisory Committee as to whether the accounting for deferred tax assets by the company is in compliance with AS-22, based on the inputs as stated above in respect of virtual certainty of future taxable income.

(iii) Opinion:
The EAC has considered the above facts, views of the Auditors and the submissions of the company. It has also considered para 17 and 18 of AS-22 dealing with ‘Accounting for Taxes on Income’. In particular, reference is made to Explanation below para 17 of AS-22 (ASI-9) and stated in para 11 of the opinion as under.

On the basis of the above, the Committee is of the view that the orders secured by the company, as mentioned by the querist in paragraph 3(a) to (c) above, may be considered while creating deferred tax asset provided these are binding on the other party and it can be demonstrated that they will result in future taxable income. However, mere projections made by the company indicating the earning of profits from future orders contemplated in paragraphs 3(a) and above, or financial restructuring proposal under consideration of the Government of India or the fact that the books of account of the company are prepared on ‘going concern’ basis as mentioned by the querist in paragraphs 3(d) and (e), respectively, may not be considered as convincing evidence of virtual certainty as contemplated in the ‘Explanation’ to paragraph 17 of AS-22 reproduced above. Further, the mere fact that the items covered u/s.43B of the Income-tax Act, 1961, the provision for liquidated damages, doubtful advances, guarantee repairs and other contingencies, and unabsorbed depreciation can be carried forward for unlimited number of years, can also not be a ground for recognizing a deferred tax asset, as mentioned by the querist in paragraphs 3(f), (g) and (h), respectively, since paragraph 17 of AS-22 read with its ‘Explanation’, requires virtual certainty supported by convincing evidence at the date of the balance sheet. The Committee also wishes to point out that a deferred tax asset can be created to the extent that future taxable income will be available from future reversal of any deferred tax liability recognised at the balance sheet date. To that extent, it would not be necessary to consider the level of virtual certainty supported by convincing evidence.

On the above reasoning the opinion of the Committee is that accounting of DTA by the company is in compliance with AS-22 to the extent stated in para 11 of its opinion.

    4. Accounting Standards:

Accounting Standards Board (ASB) has issued further exposure drafts revising the following Accounting Standards and also issued two exposure drafts of New Accounting Standards after convergence with the International Financial Reporting Standard (IFRS) and International Accounting Standards (IAS) for public comments.

    A. Revised Standards:

    i) AS-9 (Corresponding to IAS-18) — Revenue
    ii) AS-15 (Corresponding to IAS-19) — Employees Benefits.
    iii) AS-17 (Corresponding to IFRS-8) — Operating Segments.
    iv) AS-18 (Corresponding to IAS-24) — Related Party Disclosures.
    v) AS-20 (Corresponding to IAS-33) — Earnings per share.
    vi) AS-26 (Corresponding to IAS-38) — Intangible Assets.
    vii) AS-29 (Corresponding to IAS-37) — Provisions, Contingent Liabilities and Contingent Assets.

    B. New Standards:

    viii) AS-38 (Corresponding to IAS-41) — Agriculture.
    ix) AS-39 (Corresponding to IFRS-4) — Insurance Contracts.

    5. Standards on Review Engagements:

The following Standards on Review Engagements (SRE) have been published at pages stated below. These apply to Financial Statements for periods beginning on or after 1st April, 2010?:

    i) Standard on Review of Engagements (SRE) 2400 (Revised) — Engagements to Review Financial Statements. (Pages 1879-1884)

    ii) Standard on Review of Engagements (SRE) 2410 — Review of Interim Financial Information performed by the Independent Auditor of the Entity. (Pages 1885-1897)

    In the case of ICAI vs. Y.M. Mansuri, the Commissioner of Income tax filed a complaint alleging that, in his statement u/s. 131, the member admitted that the audit u/s. 44 AB of the Income- tax Act in his clients’ case was conducted in January/February but the audit report in Form 3CB was backdated i.e., 30th October to avoid penalty in his clients’ case u/s. 271 B. It was noticed that there were no markings in the books of accounts of the assessee and it was found that the books and other records were not verified and that audit report u/s. 44 AB was given without conducting the audit.

    The Disciplinary Committee as well as the Council of ICAI found the member guilty of professional misconduct and recommended that the name of the member be removed from the Register of Members for a period of six months.

    The Gujarat High Court has accepted the above findings of the Disciplinary Committee and the Council of ICAI. The defence of the member was that there was no loss of Government revenue. The High Court has observed, “Though, in financial terms, the member may be correct in stating that there is no loss of revenue, but the said contention is bereft of any substance when the underlying idea of obtaining tax audit report is considered”. The High Court has also observed, “Once statutory obligation is cast on a person and such statutory obligation provides for a period of limitation within which a particular document is required to be submitted, failure to do so within prescribed period of limitation is, by itself, liable to be visited with penalty, unless explained by a reasonable cause.” In conclusion the High Court has accepted the recommendation of the Council of ICAI to remove the name of the member from the Register of Members for six months (C.A. Journal, May 2009, page 1879).

2. Accounting for expenditure on development of corporate portal

    The Expert Advisory Committee (EAC) of ICAI has given the following opinion in the case of a Government company at Pages 1882-83 of C.A. Journal for May, 2009.

(i) Facts

(a) During the year 2005-06, the company had awarded a contract for design and development of corporate portal of the company to M/s. XYZ Ltd. at Rs.32.20 lacs. The corporate portal is leveraging the web/Internet technologies/tools for dissemination of information and allows a familiar, easy to use web. The portal is being accessed through Internet and/or Intranet. The portal is facilitating the users throughout the enterprise to access a wide variety of information, e.g., company’s announcements, tender calendar, etc. Also employees of the company can view human resource details. Portal is also helping in the speedy and efficient dissemination of information.

(b) The company has stated that an amount of Rs.32.20 lacs was incurred on development of the web portal. As per the accounting policy adopted by the company, the amount incurred on development of the web portal was capitalised along with the computer/server. A disclosure in this regard was given in the notes to the accounts.

(c) During the course of audit, the C & AG suggested that Rs.32.20 lacs should be separately shown as an Intangible Asset as required under AS -26 dealing with ‘Intangible Assets’. According to the company it was clarified that in its case AS-10 dealing with ‘Accounting for Fixed Assets’ was applicable.

(ii) Issue before EAC

The company sought opinion of EAC on the question as to whether AS-10 or AS-26 applied in such a case.

(iii) Opinion of EAC

    EAC has observed in para 11 of its opinion as under :

    “11. The Committee notes from the facts of the case that the company has capitalised the application software internally developed by the company along with the web application server and data-based server for which the reason is stated to be that the application software is an integral part of the web application server and data-based server and that the said computer machines were not supposed to be operated as stand-alone machines. In this regard, the Committee notes that application software is a software program running on the top of the operating system that has been created to perform a specific task for a user. The said computer machines can still be run through the operating system without the application software, though not for the desired tasks. Thus, the Committee is of the view that the application software cannot be treated as an integral part of the related machines and cannot be capitalised along with the said computer machines. Accordingly, in the view of the Committee, the computer software under consideration should be treated as separate internally developed intangible asset, provided it meets the requirements of AS-26.”

3. Peer review of audit firms of listed companies

    An important announcement of ICAI on this issue is at page 1991 of C.A. Journal for May, 2009. This reads as under :

“The Council of ICAI accepted the recommendation of SEBI that for appointment as an auditor of listed companies for accounting periods commencing on or after April 1, 2009 the auditor firms/practice units must have a certificate from the Peer Review Board of the Institute. Further, the Council also accepted the recommendation of SEBI that the financial statement of an unlisted company coming out with an initial public offer (IPO) should also be certified by the audit firms/practice units who have been issued a certificate from the Peer Review Board. The firms who have already been selected for peer review and their review is in progress at different stages may gear up their peer review process and ensure that their final report is submitted by the reviewer to the Board at the earliest. In order to complete the peer review exercise timely and smoothly, all the practice units and reviewers are hereby requested to expedite their peer review process. Firms who are interested in getting themselves peer reviewed may contact the Peer Review Board by emailing their request at peerreviewboard@icai.org. The mail should also indicate whether the firm is undertaking audit of listed companies as of now. For any further queries you may contact CA. K. Raghu, Chairman, Peer Review Board at kraghu9999@gmail.com.”

4. Internal auditor cannot be tax auditor– Clarification by ICAI

The Council in its 281st meeting held from 3rd to 5th October, 2008 decided that an internal auditor of an assessee, whether working with the organisation or an independently practising Chartered Accountant being an individual chartered accountant or a firm of chartered accountants, cannot be appointed as its tax auditor.

The said decision came into force from December 12, 2008. As per the decision an internal auditor cannot carry out tax audit on or after December 12, 2008. Subsequently, representations have been made pointing out the hardship being caused by the above said decision in respect of those internal auditors who have been appointed as tax auditors for the financial year 2008-09 on or before December 12, 2008. The Council considering this hardship has decided that the decision taken by the Council at its meeting between 3rd to 5th October, 2008 shall be applicable to all appointments as tax auditor made on or after December 12, 2008 and accordingly those internal auditors whose appointments have been made as tax auditors before December 12, 2008, can carry out the tax audit of the financial year ending on March 31, 2009, i.e., Assessment Year 2009 – 10 only.

5. ICAI move to check dummy articleship

a) The coaching classes shall not continue after 9.30 a.m./or start before 5.30 p.m. so as to enable the articled/ audit assistants to concentrate wholly on practical training.

b) Members of the Institute who are engaged in coaching be advised not to undertake coaching  between 9.30 a.m. and 5.30 p.m.

c) An articled assistant should undergo practical training in accordance with the guidelines of the Institute between 10.30 a.m. and 5.30 p.m. During the period an articled assistant shall not be permitted to attend colleges / other institutions for graduation or any other course.

d) Every articled/ audit assistant shall submit once in a year a specific declaration duly countersigned by the principal to the effect that he is regularly attending training and his college hours do not clash with his articles timings and that no coaching is undertaken by him between 9.30 a.m. and 5.30 p.m. on any working day. In the event of breach of these guidelines and not taking permission as required, the articles already undergone shall be derecognised for such period as the Institute may decide.

e) Every articled/audit assistant shall be required to maintain mandatorily the Work Diary in the form to be prescribed by the Board of Studies.

f) The Institute to call for at random training report along with attendance record and stipend details and also Work Diary maintained by articled / audi t assistant from any member / firm in respect of any articled assistant at any point of time during the period of practical training for verification.

g) In case an articled  assistant  is found  not undergoing articles in the manner prescribed, he shall be debarred from appearing in the exam up to 3 consecutive exams besides cancellation of such period of articles. The concerned member who allowed such an articled assistant be subject to punitive action besides withdrawing either partly or fully his eligibility to train articled assistant. In Peer review, the reviewer be required to verify whether training is imparted to the articled assistant in the manner prescribed.

h) No request for termination of articles is entertained from any articled assistant in general and more particularly during the first six months and also during the last twelve months of articles except as provided in the Regulations. In the event of termination, his articles shall not be registered in the same city.

i) No request of an articled assistant for termination (transfer) of articleship shall be considered unless his/her working parent(s) is/are transferred from the city / place where the articled assistant is receiving training to another city and a copy of transfer order/proof is submitted to the principal in proof thereof. On such
termination the articled assistant concerned shall join articles training in and around the place of posting of his/her parent (s) and shall not re-register articles in the same city or within 50 kms radius of the city where he/she has undergone articles prior to such termination.

j) If the articled assistant is not able to serve the articleship for specified genuine medical reasons, thereby opting to discontinue the CA course for a period of at least three months, the termination of articles be permitted, provided that the medical grounds are such that warrant termination of articleship.

k) In the event of misconduct  involving moral turpitude, gross negligence or unsatisfactory performance of the articled assistant, his articles shall be liable to be terminated by his principal besides being cancelled or extended for such period as may be decided by the Institute. Board of Studies to decide and enumerate the acts constituting misconduct.

l) Termination of articles be permitted on such other justified circumstances as my be deemed genuine by the Council.

m) While forwarding the Form No.109 the principal shall state specifically the clause (the relevant clause mentioned above) under which the articles have been terminated.

6. ICAI News

(Note:    Page Nos. given below  are from C. A. Journal  for May, 2009).

i) Working hours of articled assistants

In May, 2009, issue of BCA Journal some details on the above issue were given from a communication of the secretary dated 3.4.2009. Now detailed guidelines on the subject are published on page 1989.
 
ii) Amendment   of Form  3 CD u/s. 44 AB

In Form 3 CD after item No.17, item No.17 A as under is added-

“17A. Amount of interest inadmissible under Section 23 of the Micro, Small and Medium Enterprises Development Act, 2006”. (Refer page 1876).

iii) Panel  of arbitrators

ICAI is maintaining a panel of arbitrators. The names of the members who have undergone the Certificate Course successfully as stated on page 1932 is included in the panel.

iv) Guidelines   for network

The guidelines for network amongst the firms of Chartered Accountants have been revised. The revised guidelines are published at pages 1964-1969.

v) Perspective  Planning  Committee

The Perspective Planning Committee of ICAI has submitted its Survey Report in February 2009. Detailed findings of this survey can be obtained from ICAI website’ Announcements’ page dated 6.2.2009. Synopsis of this report is published at pages 1974-1977.

vi) Membership   fees  for 2009-10

The membership fees for 2009-10 are due on 1.4.2009. Announcement for this purpose is at page 1988.

(vii) Formation of CPE Study Circles for members in industry

ICAI has developed the norms for formation of CPE study circles which will cater the needs of members in industry – Details of these norms are published on pages 1992-1995.

(viii)Advisory for Multipurpose Empanelment Form for 2009-10

The last date for submitting of applications for Empanelment Form in 15.6.2009. This Form has been simplified and the same has been published on pages 1996-2000.

ix) Accounting Standard (AS-11)

In May 2009 issue of BCAS Journal the issue relating to amendment of AS-ll dealing with ‘The Effects of Changes in Foreign Exchange Rates’ has been discussed. ICAI has now clarified that this amendment is applicable to corporates registered under the Companies Act, 1956. In other words, AS-ll as issued by ICAI will apply to all entities other than companies. It may be noted that by this amendment of AS-II, para 46 is added in AS-11 by Government Notification. Para 46 gives option to follow the revised procedure to all enterprises. Therefore, it is difficult to understand how the amendment can be restricted to only companies. Let us hope that ICAI reconsiders its view.

x) New  publications   of ICAI

a) Technical Guide on Information Systems Audit (P.1982).

b) Technical Guide on Systems Audit of Stock Brokers (P.1982).

c) Technical Guide on Share Valuation (P.1984).

d) Technical Guide on Revenue Recognition for Software (P.1984).

e) Technical Guide on Accounting for Micro-Finance Institutions (P.1985).

f) Technical Guide on Internal Audit of StockBrokers (P.1986).

The Ethical Standards Board of ICAI has considered certain ethical issues. Some of these issues are as under:

(i) Issue No: 1

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

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

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

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:-

Highest Salary offered for >

• Domestic Postings `16.55 lakh P.A. (5 Candidates)

• International Postings `21.00 lakh P.A (4 Candidates)

•    Minimum salary paid by

• Corporates Rs.4.5 lakh P.A.

• C.A. Firms Rs.3.00 Lakh P.A.

(Note: Page Nos. given below are from CA Journal of May, 2013)

(i)    Reporting of Foreign Currency Gains & Losses (P.1664)

(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).

The Ethical Standards Board of ICAI has considered some ethical issues which are published in C.A. Journal of May, 2011, at page 1653. Some of these issues are as under:

(i) Issue: Can a Chartered Accountant in practice agree to select and recruit personnel, conduct training programmes and work studies for and on behalf of a client?

Response: The ‘Management Consultancy and other Services’ as specified by the Council includes both, personnel recruitment and conduct of training programmes and work studies. As such, the same are permitted for a Chartered Accountant in practice.

(ii) Issue: Can a Chartered Accountant in practice secure any professional business through the services of a person who is not his employee or partner?

Response: The CA Act, 1949 does not permit a practising Chartered Accountant to secure, either through the services of a person who is not an employee of such Chartered Accountant or who is not his partner, any professional business.

(iii) Issue: Can a Chartered Accountant in practice seek professional work from his professional colleagues?

Response: As per CA Act, 1949 a member is permitted to apply or request for, or to invite, or to secure professional work from another Chartered Accountant in practice.

(iv) Issue: Can a Chartered Accountant in practice accept original professional work emanating from a client introduced to him by another member?

Response: A Chartered Accountant in practice should not accept the original professional work emanating from a client introduced to him by another member. If any professional work of such client comes to him directly, it should be his duty to ask the client that he should come through the other member dealing generally with his original work.

(v) Issue: Can a Chartered Accountant accept the appointment as Superior Authority by Certifying Authority for processing Digital Signature?

Response: A Chartered Accountant may accept the appointment as Superior Authority by Certifying Authority for processing Digital Signature.

(vi) Issue: Whether the Code of Ethics will be applicable outside India?

Response: The Code of Ethics of the Institute is applicable to all its members even outside India.

2. Annual Accounts of ICAI for the year ending 31-3-2010:

3. Revenue Recognition of sales in foreign currency hedged by a forward contract:

A listed manufacturing company has domestic sales as well as export sales and the company has the following forex hedging strategy for currency risk:

(a) The hedged exposures/forecasted cash flows are highly probable because these are always based on signed contracts, sales orders and purchase orders.

(b) The hedge documentation (such as forex policy/procedure, the documentation of each individual hedge, selection of hedge instruments, etc.) is in place.

(c) There is always one-to-one relation between the hedged exposure and hedge instrument (no netting, no clubbing together of hedged items).

(d) The relation of hedged item versus hedge instrument is 100% effective and can be measured accordingly.

After entering into an export order the company takes forward cover for the full amount of the sales invoice which is receivable in US Dollars normally after sixty days. The forward cover is also taken for sixty days.

Query:
In the light of the above, the company has sought the opinion of the EAC regarding revenue recognition on the following issues:

(i) The rate at which the sale should be accounted, (a) whether at the rate on the date of bill of lading, on which date the property in goods has passed on to the customer as per the contract, or (b) at the forward contract rate i.e., the rate at which the company will be realising the sale proceeds from the customer on due date.

(ii) It is assumed that the customer will not fail on the due date for the purpose of the above. If customer fails to pay on the due date what will be the opinion of the Committee.

(iii) Will the company be complying with (a) Accounting Standard (AS) 9, ‘Revenue Recognition’; (b) Accounting Standard (AS) 11, ‘Effects of Changes in Foreign Exchange Rates’, (c) Accounting Standard (AS) 30, ‘Financial Instruments: Recognition and Measurement’, (d) AS 31, ‘Financial Instruments: Presentation’ and (e) AS 32 ‘Financial Instruments: Disclosure’, dealing with hedge accounting?

Opinion of EAC:

After considering paragraph 9 of Accounting Standard (AS) 11, the Committee is of the view that the sales in the instant case should be recorded by applying the exchange rate at the date of the transaction. The transaction date for the purpose of recognition of revenue would be the date on which the significant risk and rewards of the ownership of goods are transferred to the buyers.

Further, considering the Accounting Standard (AS) 9, the Committee is of the view that the revenue should not be recognised unless it is reasonably certain that the ultimate collection of the revenue will be made. However, if the uncertainty relating to collectability arises subsequent to the recognition of revenue, a separate provision for the uncertainty should be recognised.

Furthermore, the Committee clarified that for the accounting purposes, the issue of recognition of revenue is independent of the accounting for foreign exchange transactions, including hedging. Accounting for sale. i.e., recognition of revenue in the present case would be governed by the provisions of AS-9. Accounting for foreign exchange transactions, including hedging, is governed by AS-11 and/or AS-30 depending upon the nature of the transaction. In the instant case, since the transactions undertaken by the company have been stated by the company to be highly probable forecast transactions, forward exchange contracts in respect of these transactions can be accounted for as a cash flow hedge considering the provisions of AS-30. So, if the company accounts for revenue (sales) at forward contract rate it will not be complying with the requirements of AS-9, AS-11, AS-30 and AS-32. AS-31 is not relevant in the present case.

(Refer pages 1650 to 1652 of C.A. Journal of May, 2011)

4. Amendments in Service tax relating to Chartered Accountants:

(i) Point of Taxation Rules, 2011, have come into force from 1-4-2011. Under these Rules, Service tax will be payable on the date of invoice or payment, whichever is earlier. If the invoice is not issued within 14 days of rendering the services, the tax is payable from the date of rendering such service. Option is given to assessees to postpone the effective date to 1-7-2011 under certain circumstances.

(ii) However, due to efforts of ICAI and other professional bodies, in the cases of Chartered Accountants, cost accountants, company secretaries, architects or interior decorators, persons rendering legal, scientific or technical consultancy service, a concession is given to these professionals to pay Service tax on receipt of fees, as at present.

(iii) By a Notification No. 25/2006, dated 13-7-2006 exemption was given to practicing Chartered Accountants, cost accountants and company secretaries in respect of professional fees received by them from clients for representation before tax or other statutory authority. This exemption is now withdrawn w.e.f. 1-5-2011 by a Notification No. 32/2011, dated 25-4-2011. Therefore, these professionals will have to charge Service tax on fees to be charged to clients for representation before tax and other statutory authorities.

5. ICAI News:

(Note: Page Nos. given below are from C.A. Journal of May, 2011)

All companies that are part of coverage in Phase-I would be the following class of companies which will be required to file the financial statements in XBRL form only from the year 2010-11:

•     All companies listed in India and their subsidiaries, including overseas subsidiaries;

•     All other companies having paid up capital of Rs.5 crore and above or a turnover of Rs.100 crore or above.

All companies covered by Phase-I would be permitted to file the above financial statements up to 30-9-2011 without any additional filing fee. (Page 1649)

(ii) DISA holder to conduct system audit:

The RBI vide its recent Circular relating to submission of system audit reports has allowed a holder of a Diploma in Information System Audit (DISA) of the ICAI to conduct audit of Authorised Payment System Operators and Entities, apart from a Certified Information Systems Auditor (CISA) and registered with Information Systems Audit and Control Association. (Page 1610)

(iii) Appellate Authority under C.A. Act:

The Appellate Authority u/s. 22A(1) of the Chartered Accountants Act, 1949 was constituted by the Central Government in March, 2009, but the same was not functional, as the Chairperson of the

Authority had not taken charge. Recently, Justice Shri S. N. Dhingra (Retd.) has been appointed by the Government as the Chairperson. Shri Dhingra along with the representatives of all the three institutes would meet the MCA Secretary where it would be, inter alia, proposed to request for an office space for the Appellate Authority that is currently housed in the ICAI headquarters in New Delhi. (Page 1611)

(iv)    Recommended fee structure on professional assignment:

The Council of ICAI has recommended the minimum scale of fees for professional assignments undertaken by our members. Separate fees are recommended for members practising in metros and non-metros. Details are available on the website of ICAI. Broadly stated, these fees are as under:

Note: Separate minimum fees are recommended for work relating to (a) VAT/Profession Tax, (b) Audit and other assignments, (c)    Management services, (d) Investigation, (e) Certification, (f) Consultation, (g) Arbitration, (h) NBFC, RBI matters, (i)    FEMA matters, (j) Service tax, and (k) Project Financing. (Page 1610)

CA NKP SALVE, an eminent member of our profession, passed away on 1st April, 2012 at the age of 91. He was a member of Lok Sabha from 1967 to 1977. Later he was a member of Rajya Sabha from 1978 to 2002. He was also a Minister in the Union Government and held Chairmanship of various committees of Parliament. He was fond of cricket and headed various Cricket Associations including BCCI. During early years he played cricket in Ranji Trophy and Common Wealth Matches. He was accorded State funeral by the Maharashtra Government. We pay our respectful tribute to the departed soul with a prayer that his noble soul may rest in peace.

(ii) Job Fair for SME firms of Chartered Accountants

ICAI has structured campus placement programme for firms of Chartered Accountants for recruitment of newly qualified Chartered Accountants. Details are published on pages 1755-1756.

(iii) New Publications

(a) Technical Guide on Internal Audit of Mining and Extractive Industry

(b) Technical Guide on Internal Audit of Not-for- Profit Organisations (page 1625)

A company is a joint venture company of three public sector enterprises and is engaged in transportation of petroleum through underground pipeline. The company is following depreciation policy of its fixed assets on Straight Line Method (SLM) at applicable rates as prescribed in Schedule XIV to the Companies Act, 1956. The company is charging average rate of depreciation on plant & machinery and main pipeline considering single shift @ 4.75% double shift @ 7.42% and triple shift @ 10.34% as per the rates specified in Schedule XIV to the Companies Act, 1956. Zero depreciation was considered for shutdown period as no rate has been specified for shutdown period in Schedule XIV to the Companies Act, 1956. The methodology has been followed consistently since commissioning from the financial year 2003-04 onwards.

During the supplementary audit conducted by the Comptroller and Audit General of India (C&AG) for the financial year 2009-10, it commented that extra shift depreciation was worked out on 365 days instead of actual number of 329 working days and applied the average rate of depreciation of 7.381% against required 8.547%. The above have resulted in understatement of depreciation for the year and overstatement of net block of fixed assets by Rs.6 crores.

Query:

The company has sought the opinion of the Expert Advisory Committee on the adoption of the method of depreciation on extra shift working to comply with the minimum depreciation as per Schedule XIV to the Companies Act, 1956.

Opinion:

(i) Issue: Whether a member in practice is permitted to undertake the management of NRI funds? A member is not permitted to undertake such assignment because the same is not covered under ‘Management Consultancy and other Services’ permitted to be rendered by the practising members of the Institute.

(ii) Issue: Can a Chartered Accountant provide ‘Portfolio Management Services’ (PMS) as part of CA practice? Explanation to Clause (xix) of the definition of ‘Management Consultancy and other Services’ expressly bars the activities of broking, underwriting and Portfolio Management.

(iii) Issue: Whether a Chartered Accountant in practice is required to obtain any trade licence for practising? A Chartered Accountant in practice is not required to obtain any trade licence for practising as a professional. The certificate of practice issued by the Institute is the only requirement to practise as a Chartered Accountant.

 (iv) Issue: Can a Chartered Accountant in practice work as a ‘Collection Agent/Recovery Agent’? A Chartered Accountant in practice cannot work as a Collection Agent. However, he can act as a Recovery Consultant as provided in clause (xxv) of the definition of ‘Management Consultancy and other Services’.

(v) Issue: Whether a practising Chartered Accountant can agree to select and recruit personnel, conduct training programmes and P. N. Shah H. N. Motiwalla Chartered Accountants icai and its members work studies for and on behalf of a client? The expression ‘Management Consultancy and other Services’ defined by the Council includes both personnel recruitment and selection and conducting training programmes and workstudies. Therefore, a Chartered Accountant in practice shall not commit any professional misconduct by rendering such services for and on behalf of the client.

(vi) Issue: Can a member in practice have a branch office/additional office/temporary office?

A member can have a branch office. In terms of section 27 of the Act, if a Chartered Accountant in practice or a firm of Chartered Accountants has more than one office in India, each one of such offices should be in the separate charge of a member of the Institute. Failure on the part of a member or a firm to have a member in charge of its branch and a separate member, in case of each of the branches, where there is more than one, would constitute professional misconduct. However, exemption has been given to members practising in hilly areas, subject to certain conditions.

It is to be noted that the requirement of section 27 with regard to a member being in charge of an office of a Chartered Accountant in practice or a firm of such Chartered Accountants shall be satisfied only if the member is actively associated with such office. Such association shall be deemed to exist if the member resides in the place where the office is situated for a period of not less than 182 days in a year, or if he attends the said office for a period of not less than 182 days in a year, or in such other circumstances as, in the opinion of the Executive Committee, establish such active association. It is necessary to mention that the Chartered Accountant in charge of the branch of another firm should be associated with him or with the firm either as a partner or as a paid assistant. If he is a paid assistant, he must be in whole-time employment with him. However, a member can be in charge of two offices if they are located in one and the same accommodation.

(i) Case of RBK:
In this case, the Bank had complained that the member has issued financial statements to 97 persons from the same place. The Bank had given loans to these persons on the basis of these statements. On inspection by the Bank, it was found that these persons had no business activity or source for repayment of loans.

During the inquiry, the DC found as under:
(a) T hat the member had issued projection statements which were signed by him without putting any date;
(b) T hat the projection statements did not disclose the exact years and instead stated years I, II, III, IV and V, creating ambiguity for the reader about the years for which projections were given;
(c) T hat in a number of cases, the member had issued two/three projection statements for the same individual certifying different figures;
(d) T hat the basis on which the said statements were issued were not disclosed by the member.

The explanation given by the member was that he had issued the certificates based on the information given by the parties. He could not produce any documents on which reliance was placed.

The DC also noticed that the Branch Managers who gave the advances had not made any inquiries about the capacity of the parties and loans were sanctioned without authority.

On the basis of the above, the DC held that the member allowed his name to be used in the projection statements, giving the impression that he vouches for the accuracy of the information. It also held that he failed to carry out his duties in a diligent manner and failed to obtain sufficient information for expression of his opinion. Therefore, the DC held the member guilty of professional misconduct under clauses (3), (7) and (8) of Part I of the Second Schedule to the C.A. Act.

The DC further noted that all the loans were given in contravention of the prescribed rules of the Bank and some officials at the Branch Level were involved in it. Moreover, all loans were recovered by the Bank and all accounts were closed. In view of this, the DC has taken a lenient view and awarded punishment by way of “Reprimand” to the Member (pages 126-134).

(ii) Case of R.P.R:
In this case, R.P.R. had conducted the Audit of a Cooperative Housing Society for the years 2003 to 2007 and given one Audit Report for all the four years. The allegation against him was that the Income & Expenditure Account for any of the years was not prepared and only the Balance Sheet as at 31-03-2007 was attached to the Audit Report. It was further alleged that the notes to the Audit Report were highly damaging. Therefore, he could not have stated that the accounts give a true and fair view of the state of affairs of the Society.

During the inquiry by DC the member explained as under:-

(a) T hat he prepared the Balance Sheet and Audit Report for the limited purpose of addressing litigation amongst the members of the Society;
(b) T hat he had relied on the audit done by the previous auditor and followed in the period covered under the Audit;
(c) That he had pointed out the deficiencies in his report by way of Annexure to the report;
(d) That no Income & Expenditure Account was prepared as the Project was under construction;
(e) T hat he had carried out the assignment to the best of his ability. However, he admitted that due to lack of experience, there could be some technical mistakes, but the same could not be said to be due to negligence on his part. He further stated that there was no malafide intention. It was admitted that he had not done audit of similar works earlier and therefore there could be some mistakes.

The DC noted that there were several mistakes in conducting the Audit and the member had not followed Auditing Standards i.e. AAS-28. Further, the member had admitted that there were mistakes in giving Audit Report due to lack of experience of similar audit. Therefore, the D.C held that the member was guilty of professional misconduct under clauses (7), (8) and (9) of Part I of the Second Schedule to the C.A. Act.

Looking to the facts of the case, the DC awarded punishment of “Reprimand” as the DC found that the mistakes were of technical nature and that the member had also shown remorse for his mistakes in the written representation (page 67 to 73).

2. Financial Reporting Review Board (FRRB)

ICAI has constituted FRRB with the objective to improve the Financial Reporting Practices. Observations of FRRB after examining the Accounting Policies followed by Companies in their published financial statements have been published in the publication “Study on Compliance of Financial Reporting Requirements” Vol – II. Some of the observations of FRRB are given below. Page numbers. given below are from this publication.

(i) AS-2 (Inventory Valuation)
In the Annual Reports of some Companies, the accounting policy for valuation of Inventories simply states that Raw Materials, Stores and W.I.P are valued at the lower of cost and the net realisable value.

Observation of FRRB: It may be noted that Companies have disclosed the policy for Valuation of Inventories, but they have not disclosed the cost formula used for Valuation of Inventories, which is required to be disclosed as per Para 26(a) of AS-2 (Page 11-12)

(ii) AS-2 (Inventory Valuation)
From the Schedule of “Inventories” given in the Annual Reports of some Companies, it has been noted that Inventories were described “As taken, Valued and Certified by the Management”.

Observation of FRRB: I t may be noted from the clarification given in the Guidance Note on “Audit of Inventories” that the use of the expression “As valued and certified by the Management” may lead the users of Financial Statements to believe that the auditor merely relied on the management’s certificate without carrying out any other appropriate audit procedures to satisfy himself about the existence and valuation of Inventories. Further, use of this type of wording indicates that there is a disclaimer for Inventories which should be avoided (page 12).

(iii) AS-2 (Inventory Valuation)
From the Schedule of Current Assets given in the Annual Report of a Company, it is noted that stock-in-trade also includes the stock of DEPB Receivables as well as Plant and Machinery retired from active use.

Observation of FRRB: It may be noted that under Para 4 of AS-2, Inventories include finished goods, WIP, Raw Materials, Consumables, Loose tools etc. Therefore, DEPB Receivable should be treated as part of Loans and Advances and Plant & Machinery retired from active use should be included as part of Fixed Assets. Hence, they should not be included in Inventories (page 16-17).

3. Some of the Ethical Issues:
The Ethical Standards Board has given answers to some Ethical Issues on Pages 1612-1614 of C.A, Journal for May, 2014. Some of these issues are as under:-

(i) What is the Conceptual Framework Approach?
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 other than clearly insignificant, 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)    What are the threats involved while complying with the fundamental principles?

Compliance with the fundamental principles may potentially be threatened by a broad range of circumstances.  these  are  (a)  Self-interest  threats  (b) Self-review  threats  (c)  advocacy  threats  (d)  familiarity threats and (e) intimidation threats.

(iii)    What are the available safeguards that may eliminate or reduce the threats at an acceptable level?

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)    What is Ethical Conflict resolution?
Ethical conflict resolution means to resolve a conflict in the application of Fundamental Principles while evaluating compliance with the fundamental principles.

4.    EAC Opinion
Accounting treatment of Subsequent expenditure on technological Upgradation/Improvements on Capital Assets:

Facts:
T company is a wholly-owned Government of india enterprise incorporated in the year 1965 with the main objective of setting up cement plants in deficit areas to cater to the needs of that area and other neighbouring States.  The  company   has  stated  that  though  it  is  the only Government of india enterprise in the country in the cement sector, its market share is less than 1% of the total market share in the country, thereby leading to severe competition from private entrepreneurs in the market. the company has one of its cement factories in one of the districts of Andhra Pradesh, that was commissioned in  the  year  1987.  The  plant  has  been  in  operation  for more than 25 years after its commissioning and most of its major equipments have outlived their lives.

Now the company having been declared sick by  the Bifr in the year 1996, due to erosion of its net worth,  no technological upgradation/modernisation could take place as was called for the cement industry due to fast technological changes. however, normal maintenance was carried out to keep the plant running. as many new cement plants with higher capacity and latest technology have been set up by private entrepreneurs in the vicinity of the plant of the company in Andhra Pradesh and Karnataka, the company had been facing severe competition from private entrepreneurs in the industry and the company  is finding difficulty to operate the plant economically without modernisation/technology upgradation.Therefore, in place of changing the vital equipments with latest technology which entails substantial investment, the company made an endeavour to upgrade/improve icertain equipments with certain amount of expenditure with a view to increase the standard efficiency of the  vital equipments, increase its useful life and reduce the operating cost to the extent  possible. The company has, therefore, undertaken modernisation/upgradation of vital equipments, keeping energy efficiency and environment friendly technology in mind, to increase their standard performance with increase in overall productivity and standard operating efficiency of the plant.

Query:
In view of the above, the opinion of the eaC of ICAI is sought on the following issues: (a) Whether the cost of above modifications/upgradation/improvements can be capitalised along with the cost of concerned equipments and depreciation charged accordingly; or (b) Whether the cost of above modifications/ upgradations/improvements should be amortised/depreciated over a period of 10-15 years as the benefit of the above works would result in further increase in useful life of the equipments by not less than 10 years.

Opinion:
After considering paragraph 23 of Accounting Standard (aS) 10, ‘accounting for fixed assets’, the  Committee is of the view that expenditure on fixed assets subsequent to their installation may be categorised into (i) repairs and (ii) Improvements or betterments.   repairs, implies “the restoration of a capital asset to its full productive capacity after damage, accident, or prolonged use, without increase in the previously estimated service life or capacity”. it frequently involves replacement of parts. On the other hand, betterment is defined as “ … an expenditure having the effect of extending the useful life of an existing fixed asset, increasing its normal rate of output, lowering its operating cost, or otherwise adding to the worth of benefits it can yield. The cost of adopting a fixed asset to a new use is not ordinarily capitalised unless at least one of these tests is  met.  A betterment is distinguished from an item of repair or  maintenance  in that the latter has the effect of keeping the asset in   its customary state of operating efficiency without the expectation of adding future benefits.

Thus,  the  Committee  is  of  the  view     that  normally, expenditure on repairs, including replacement cost necessary to maintain the previously estimated standard of performance, is expensed in the same period. Similarly, the cost of adopting a fixed asset to a new use or modernisation of such asset without actually improving the previously estimated standard of performance is also expensed.

Accordingly, in the view of the Committee, only such expenditure that add new fixed asset units or that have the effect of improving the previously assessed standard of performance , e.g., an extension in the asset’s useful life, an increase in its capacity, or a substantial improvement in the quality of output or a reduction in previously assessed operating costs are capitalised. The  Committee is of the view that ‘previously assessed standard of performance’ is not the actual performance of the asset at the time of repair/improvement etc., but the standard performance of the same asset in its original state.

From  the  facts  of  the  case,  the  Committee  notes  that it has been stated that the expenditure has resulted in increased productivity, reduced operating costs and also enhanced the life of the equipments. however, the Company has not informed whether the increase in productivity or enhancing the life is beyond the previously assessed standard of performance of the concerned equipments. It is only the increase beyond the standard of performance of the concerned equipment in their original state, which is treated as betterment and related expenditure is capitalised.

After considering paragraph 23 of AS 26, the Committee is of the view that if the above upgradation/modernisation results into an increase in the useful life of the concerned asset the unamortised depreciable amount of the concerned asset along with  the  expenditure  incurred on upgradation/modernisation should be charged over the revised remaining useful life subject to the useful life implicit from the specified rates as per Schedule XIV to the Companies act, 1956. The Committee wishes to point out that such depreciation should be charged with reference to the ‘useful life’ and not with reference to ‘physical life’ of the asset.