Month: October

    (i) The threshold limit of total sales/turnover/gross receipts for the purposes of tax audit u/s.44 AB in case of business has been increased from `40 lac to `60 lac from A.Y. 2011-12. In case of the profession, the said limit has been increased from `10 lac to `15 lac.

    (ii) The Direct Tax Code Bill, 2010, proposes to provide in S. 88 that the threshold limit of total sales/turnover/gross receipts for business for tax audit shall be increased from `60 lac to `1 crore. In case of the profession, the said limit is proposed to be increased from `15 lac to `25 lac. The new provision will come into force from F.Y. 2012-13 if the DTC Bill is passed by the Parliament with the above provision.

    (iii) U/s.314(86) of DTC, 2010, the due date for filing the return of income by an assessee, who does not have business income, is proposed to be advanced from the existing 31st July to 30th June. Similarly, the due date for filing the return in cases of companies and other assessees is proposed to be advanced from 30th September to 31st August. Therefore, from 2013 the Tax Audit Report will have to be given by 31st August, 2013.

    (iv) S. 271B provides for levy of penalty for non-compliance with the provisions of S. 44AB at the rate of ½% on total sales, turnover or gross receipts. The maximum penalty has been increased from `1 lac to `1.50 lac from A.Y. 2011-12.

    (v) Proposed S. 232 of the Direct Tax Code Bill, 2010, provides that the minimum penalty shall be `1 lac and the maximum penalty will be `2 lac w.e.f. F.Y. 2012-13 for non-compliance with the provisions of S. 88 to get the tax audit report before the due date.

2. Know your ethics :

The Ethical Standards Board of ICAI has discussed some ethical issues at page 394 of September, 2010, issue of C.A. Journal as under :

(i) Whether a member of the Institute in practice is liable for professional misconduct if he does not follow the direction given by the Council or an appropriate Committee or on behalf of any of them, to the incoming auditors not to accept the appointment as auditors, in the case of unjustified removal of the earlier auditors ?

Ans. : In exercise of the powers conferred by Clause (1) of Part II of the Second Schedule to the CA Act, the Council of ICAI issued General Guidelines, 2008 which specify that a member of the Institute in practice shall follow the direction given by the Council or an appropriate Committee or on behalf of any of them, to him being the incoming auditor(s) not to accept the appointment as auditor(s), in the case of unjustified removal of the earlier auditor(s).

(ii) Can the auditor revise his audit report ?

Ans. : The Council has issued a ‘Guidance Note on Revision of the Audit Report’ in booklet form. The auditor can revise his audit report in the situations and circumstances mentioned therein.

(iii) What is the status of a Chartered Accountant who is a salaried employee of a Chartered Accountant in practice or a firm of such Chartered Accountants ?

Ans. : An associate or a fellow of the Institute who is a salaried employee of a Chartered Accountant in practice or a firm of such Chartered Accountants shall, notwithstanding such employment, be deemed to be in practice for the limited purpose of the training of article assistants. He may hold Certificate of Practice, but he is not entitled to perform attest functions w.e.f. 1-4-2005.

(iv) Can a member in practice be Promoter/Promoter Director of a company ?

Ans. : There is no bar to a member in practice becoming a promoter/signatory to the Memorandum and Articles of Association of any company. For becoming such promoter/signatory, members are not required to obtain specific permission of the Council.

(v) Can such a Promoter/Promoter Director of a company be Director Simplicitor of that company ?

Ans. : There is also no bar for such a Promoter/Signatory becoming Director Simplicitor of that company, irrespective of whether the objects of the company include areas which fall within the scope of the profession of Chartered Accountants. In this case also, specific permission of the Council is not required.

(vi) Can a member in practice be a sleeping partner in a family business concern ?

(vii) Can a member who is in part-time/full-time employment apply for Certificate of Practice and perform audit ?

(viii) What should be the size of the signboard for the office ?

 Ans. : With regard to the size of the signboard for his office that a member can put up, it is a matter in which the members should exercise their own discretion and good taste. The size of the signboard should be reasonable. Use of glow signs or lights on large-sized boards as is used by traders or shopkeepers would not be proper. A member can have a name board at the place of his residence with the designation of a Chartered Accountant, provided it is a name plate or name board of an individual member and not of the firm.

3. EAC Opinion: Treatment of liquidated damages payable for delay in commissioning of plant :

    Facts :

A limited company having its registered office in India is a group member of a transnational player in the global gases and engineering industry. The company’s gases division is engaged in the manufacture and sale of industrial, medical and special gases to customers across industries.

The company has entered into one such Long Term Agreement (LTA) dated 31st May, 2006 for supply of industrial gases to a customer by installing an air separation plant (the plant) at the customer’s steel works premises on Build-Own-Operate (BOO) basis. As per one of the clauses of the ‘general conditions’ of the agreement, the company is liable to pay ‘late start liquidated damages’ to the customer if there is a delay in the commencement of gas supply from the plant after the target commencement date due to the company’s fault and the customer is ready to consume gas at its expanded steel-making facility.

As per the agreement, the target commencement date was 31st March, 2008, being the date on which the company estimated that it would be able to start fulfilling its obligation to supply gas from the plant. However, due to delay by the main equipment supplier of the plant and other related problems at site, the company was not ready to commission the plant and commence supplies on the target commencement date and instead, was ready for supply for gases only in November 2008. At this stage, due to the economic downturn, the customer requested to further delay the start-up of the plant which was finally commissioned in February 2009.

The company is now in the process of negotiating a settlement with the customer for the delays in plant commissioning on both its own as well as on the customer’s part. As a result of such negotiation, the company will have to pay ‘late start liquidated damages’ to the customer for the delayed commissioning of the plant due to its inability to have the plant ready for supply of gases on the appointed target commencement date of 31st March, 2008.

    Query:

Based on the facts stated above, the querist has sought the opinion of the Expert Advisory Committee, on the following issue:

“Whether the amount to be paid by the company on account of liquidated damages due to delay in commencement of supply of gases to the customer consequent upon delay in bringing the plant to its working condition on the appointed target commencement date can be capitalised in its books of account as additional cost attributable to the project (capitalised in March 2009) in accordance with the provisions of AS-10 and any other related Accounting Standard or statute, or whether the liquidated damages payable can be treated as deferred revenue expenditure to be amortised over a period of 3 to 5 years after the commencement of commercial production, or whether the company can charge off the amount of liquidated damages as an expense in the profit and loss account?”

    Opinion:

The Committee noted that the basic issue raised in the query relates to the treatment of liquidated damages payable by the company for delay in the commissioning of the plant.

After considering paragraphs 9.1, 20 and 21 of Ac-counting Standard (AS) 10 — Accounting for Fixed Assets, the Committee noted from the facts of the case that the ‘late start liquidated damages’ are payable by the company on account of delay in the commencement of gas supply from the plant on the target commencement date. The Committee is of the view that such expenditure cannot be said to be attributable to bringing the plant to its working condition for its intended use. Such expenditure is not attributable to construction activity. It is also not in the nature of price adjustment on account of which cost of a fixed asset may undergo a change subsequent to its construction. The Committee is of the view that the liquidated damages are of the nature of a penalty resulting from non-fulfilment of the terms of the agreement, in this case, the target date of commencement of gas supply. The amount of liquidated damages is compensation to the customer for loss of revenue on account of non-supply of gas by the company. Accordingly, the Committee is of the view that such expenditure cannot be capitalised and should be expensed by way of charge to the profit and loss account as no future benefit is expected from the same.

    [Refer pages 418 to 420 of C.A Journal of September, 2010]

        4. Important announcements for PE-II and PCC
    Students:

The following important announcement is made by the President, ICAI, in his communication on page 386 of C.A. Journal for September, 2010.

The Council has considered the case of PE-II stu-dents especially in order to mitigate their hardship vis-à -vis their joining the CA course through PCC/IPCC route. PE -II students having joined the course through all streams can now commence articled training in case they have passed any of the groups of PE-II examination instead of earlier requirement of passing both the groups. They will also be eligible to appear in the final examination during the last 12 months of articled training. In addition, such students shall be exempted from undergoing the Orientation Programme, on switching over to IPC course. Further, they shall not be charged any fee for switching over to IPC course, except `1,500 to cover the cost of study material and administrative charges, instead of `4,000 at present.

With a view to bringing overall uniformity, students registered for Professional Competency Course (PCC) shall now be eligible to appear in the final examination during the last six months of the three and a half year period of articled training as against the earlier requirement of appearing in the final examination after completion of articled train-ing. Further, realising the difficulties faced by the students to complete the Information Technology Training (ITT) and Orientation Programme before appearing at the examination, it has now been decided that all students would now be permitted to submit proof of their successful completion of ITT to the Examination Section before the commencement of the article training, instead of earlier requirement of submitting the said proof before appearing in the examination. However, this would not be applicable to the PCC students. However, it has also been observed that many students are withdrawing their registration from ITT centres and they wish to complete the ITT and Orientation Programme before the commencement of the article training. All such students are advised to undergo ITT and Orientation Programme as early as possible, because this would not only help them in solving the questions posed in examinations in the IT paper but also release the pressure on the training centres.

        5. ICAI News:

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

    (i) ICAI job portal:
The ICAI job portal has been developed to provide a platform for industry to fill their vacancies for Chartered Accountants and Accounting Technicians. The recruiting organisations as well as experienced Chartered Accountants and Accounting Technicians can avail the benefit of this job portal. For this purpose, they can contact the Secretary to CMII by E-Mail placements@icai.org or ssuneja@icai.org (Tel No. 011-30110450/491) (refer page 498).

        ii) ICAI publication:
        a) Accounting Reforms in India — A Bird’s-eye View.

        b) Technical Guide on Internal Audit of Sugar Industry
    (pages 499-500)

        iii) Peer review of audit firms of listed companies:

The Peer Review Board of ICAI is in the process of updating the status of the firms. Accordingly, the Peer Review Board has desired to know the status regarding whether your firm has been peer reviewed in the past or whether the peer review certificate has already been issued to your firm for updation of the latest position regarding the status due to the migration of firms from the Stage II to Stage I and vice-versa. In view of this, it is requested that the latest status of your firm may kindly be sent at email id peerreviewboard@icai.org so as to expedite the peer review of the firms doing the audit of the listed companies which has been mandatory as per the Circular dated April 5, 2010 issued by SEBI. Further, the firms doing the audit of the listed companies who’s peer review process is not initiated by the Board may also send a request for voluntary peer review to the Peer Review Board. (pages 501-502)

        iv) Assurance Reports on Contacts at a Service Organisation:

Auditing and Assurance Standards Board has issued an Exposure Draft of Standard on Assurance Engagements (SAE) 3402 of ‘Assurance Reports on Control at a Service Organisation’ for comments by Members. (Refer pages 507 to 522)

        v) Status of convergence with IFRS:
The latest position of finalisation of Accounting Standards after convergence with IFRS is explained by the President of ICAI in his communication (page 383).

        vi) Training for members for ICAEW membership:

Members of ICAI who desire to become members of the Institute of Chartered Accountants England and Wales have to appear in one paper on Advanced Case Study (4-hour final paper) and undergo training. The ICAI has made arrangements for this training as stated in the President’s Communication. (page 385)

        vii) Disciplinary cases:
It is reported that since February, 2010, onwards the Disciplinary Committee has passed orders u/s. 21D in 60 cases and u/s.21B in 20 cases. Further, 10 old disciplinary cases have also been completed. So far as Board of Discipline is concerned, it has disposed of 34 cases u/s.21A. It is understood that prior to February, 2010, several other similar cases have been decided by the Disciplinary Committee as well as Board of Discipline. (page 385)

    However, the ICAI has not published decisions taken by these two committees under the new provisions and therefore, members of ICAI are not aware as to what are the decisions of these two committees on various provisions of the two Schedules of the CA Act.

The Ethical Standards Board of ICAI has considered some ethical issues which have been published in C.A. Journal for September, 2011, at page 380. Some of these issues are as under:

(i) Issue: If a member has passed any additional course of the ICAI, is he permitted to print such qualification on visiting cards, letter heads and other stationery?

Under Clause (7) of Part I of the First Schedule to the C.A. Act, a member is permitted to print such qualification on the visiting cards, letter heads and other stationery like a degree of a University established by law in India or recognised by the Central Government or a title indicating membership of the ICAI or of any other Institution that has been recognised by the Central Government or may be recognised by the Council.

(ii) Issue: Whether a member in practice can use the designation (District Governor) in his rotary visiting card along with the term ‘Chartered Accountant’?

The member who is in practice cannot use the designation of ‘District Governor’ in his rotary visiting card along with the term ‘Chartered Accountant’.

(iii) Issue: Whether public notice published in the newspaper by a Chartered Accountant individually or jointly with an Advocate in respect of acquirement of land by their client is permitted?

In terms of the Guidelines under Clause (7) of Part I of the First Schedule to the C.A. Act, as appearing in the Code of Ethics, the public notice published in the newspaper in respect of acquirement of land by their client is permissible.

(iv) Issue: Whether it is obligatory for the auditor appointed to conduct a special audit u/s.233A of the Companies Act to communicate with the previous auditor who has conducted the regular audit for the period covered by the special audit?

Council direction under Clause (8) of Part I of the First Schedule to the C.A. Act prescribes that it is not obligatory for the auditor appointed to conduct a special audit u/s.233A of the Companies Act to communicate with the previous auditor who has conducted the regular audit for the period covered by the special audit.

(v) Issue: Whether a Chartered Accountant in practice can accept audit in case the audit fee of the previous auditor remains unpaid?

In case the undisputed audit fees for carrying out the statutory audit under the Companies Act, or various other statues have not been paid, the incoming auditor should not accept the appointment unless such fees are paid. In respect of other dues, the incoming auditor should in appropriate circumstances use his influence in favour of his predecessor to have the dispute as regards the fees settled.

(vi) Issue: Whether a Chartered Accountant firm can accept branch audit of a bank when a partner has taken loan from any other branch of the same bank?

Independence of Auditors can neither be diluted nor any scope be left for dilution in the eye of stakeholders. The term ‘indebtness’ must continue to be in relation to an entity and not in relation to a branch. Thus if a partner has taken loan from any branch of a bank, the firm is not allowed to do the audit of other branch of that bank.

2. Opinion on financial statements when there is substantial interest

The Council has revised the existing guidelines on the above subject w.e.f. 28-6-2011 as under.

“A member of the Institute shall not express his opinion on financial statements of any business or enterprise in which one or more persons who are his ‘Relatives’ within the meaning of Accounting Standard (AS-18) has/have, either by themselves or in conjunction with such member, a substantial interest in the said business or enterprise.

Explanation — For this purpose and for the purpose of compliance of clause (4) of Part I of the Second Schedule of the Chartered Accountants Act, 1949, the expression ‘Substantial Interest’ shall have the same meaning as is assigned thereto under Appendix (9) of the Chartered Accountants Regulations 1988.”

It may be noted that para 10.9 of AS-18 defines ‘Relative’ to mean ‘in relation to an individual, means the spouse, son, daughter, brother, sister, father and mother who may be expected to influence or be influenced by that Individual in his/her dealing with the reporting enterprise.’ (Refer pages 488-489 of C.A. Journal for September, 2011).

3. Answer Books of ICAI Examination
In a recent decision of the Supreme Court of India, in a dispute under the Right to Information Act, it is held that ICAI must disclose, if requested by a candidate in its examination, the standard criteria relating to moderation employed by it for the purpose of making revision. The submission of ICAI that it had copy right over question papers and, therefore, this cannot be disclosed even after the tests was rejected by the Court. Further, the submission to the effect that if this criteria is disclosed, the workload on the Institute will increase and it will be difficult to handle this workload in view of the large number of candidates who may demand this information, the Supreme Court has said that “Additional workload is not a defence. If there are practical insurmountable difficulties, it is open to the examining bodies to bring them to the notice of the Government for consideration, so that any changes to the Act can be deliberated upon. Examining bodies like ICAI should change their old mindsets and tune them to the new regime of the disclosure of maximum information. Public authorities should realise that in an era of transparency, previous practices of unwarranted secrecy have no longer a place”.

4. K.Y.C. Norms
The Council has formulated the following Know Your Client Norms (KYC norms) which shall be recommendatory in nature, and apply only in case of attest function by members in practice w.e.f. 13-7-2011.

K.Y.C. Norms

The financial services industry globally is required to obtain information of their clients and comply Know Your Client Norms (KYC norms).

Keeping in mind the highest standards of Chartered Accountancy profession in India, the Council of ICAI thought it necessary to recommend such norms to be observed by the members of the profession who are in practice.

In light of this background, the Council of ICAI approved the following KYC Norms. However, these norms are recommendatory in nature and every Chartered Accountant carrying out attest function is encouraged to follow them.

1. Entity Information
(i) General Information — (a) Name of the Entity, (b) Type of Entity and (c) Business Description

(ii) Corporate Structure — (a) Name of ultimate parent company, (b) Name of parent company and (c) Name of Affiliates

(iii) Regulatory Information — (a) Company PAN No., (b) Company Identification No., (c) Directors’ Identification No., (d) Directors’ Name & Addresses and (e) Name(s) and Addresses of Companies, in which above person is director

2. Other information
a) Entities financial information, (b) Name of the ultimate parent Auditor and (c) Any known violation of any Law/Regulations

5. EAC Opinion

ESOP Accounting on Account of Revision of the Exercise Price

Facts:
A listed manufacturing company had granted stock options to its employees (‘ESOP’) in August, 2007. Total number of options granted originally was 10,000 to be vested over a period of 4 years i.e., 25% each year. Market price of shares of the company on the date of ESOP grant was Rs.2,800 per share and exercise price was Rs.2,000 per share.view of AS-16.

The company decides to revise the exercise price as Rs.1,800 per share in 2009 on account of reduction in market price of company’s share which was Rs.2,000 per share in that year.

The company has raised the following questions.

(i)    Whether any additional charge is to be taken to the profit and loss account under employee cost on revision of exercise price in 2009. If yes, what will be the amount to be charged as employee cost on revision of the exercise price from 2009 onwards?

(ii)    Whether the extra charge in 2008 will be adjustable in subsequent charge to the profit and loss account in the remaining vesting period, consequent upon reduction in the number of ESOPs eligible for exercise in 2009.

(iii)    What will be the treatment of the amount credited to the ESOP Outstanding Account against original grant, i.e., Rs.800 per share (Rs.2,800 less Rs.2,000) at the time of exercise of options?

Opinion

The Committee has noted that ICAI has issued a ‘Guidance Note on Accounting for Employee Share – based Payments’. It is also noted that SEBI has also issued the “Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme). The Committee has noted that while accounting for modification of terms of stock option is not addressed in SEBI Guidelines, the same is addressed in ICAI Guidance Note.

After detailed consideration of the above guidance notes, the committee has given the following opinion.

(i)    Incremental cost on account of revision of exercise price is required to be accounted for in respect of outstanding options on the basis of difference between the exercise price measured immediately before and after the revision. As regards the amount to be charged from 2009 onwards as employee cost on account of revision of the exercise price, it should be the sum of the amount chargeable as per original plan plus the relevant portion of the incremental cost to be expensed. The basis of amortisation of the incremental cost should be same as adopted for amortisation of the original cost as per SEBI Guidelines.

(ii)    Extra charge in 2009 will be the net result of accounting for lapses and accounting for incremental cost expensed as explained in paragraph 15 of the opinion.

(iii)    At the time of exercise of the option, amount in ESOP Outstanding Account, to the extent that it is related to the options exercised, should be debited along with the consideration received against them (viz. cash/bank account), while Share Capital and Share Premium account should be credited as explained in para 16 of the opinion.

(Refer pages 416 to 419 of C.A. Journal for September, 2011)

6.    Unique Document Identification (UDIN)
Time and again, various authorities across the country have reposed their faith in chartered accountants as professionals realising the work of their attributes like integrity, excellence and independence. Based on the same, they are relying on various certifications being issued by chartered accountants in practice in the normal course of business. They look upto chartered accountants as reliable source of authentic information and to ensure compliance with various rules, regulations, procedures stipulated under different statues.

However, many instances have been brought to the attention of ICAI wherein financial statements and certificates issued by non -members or members not holding Certificate of Practice have been relied upon by authorities as true statements and certificates. It needs no reiteration that a certificate issued by a practising chartered accountant binds him to its accuracy and subject him to disciplinary proceedings of the Institute, in case a complain in that regard is filed with the Institute by the concerned authorities or any affected party.

To ensure the authenticity of various statements and documents being certified/attested by Chartered Accountants, ICAI has introduced the new concept of Unique Document Identification Number. The said scheme is available at the link http:/www.icai.org/uid

Clarifications on various issues relating to UDIN are given on pages 504 and 505 of C.A. Journal for September, 2011.

7.    CA Profession and Women Empowerment
In the CA students Journal for September, 2011, a write-up on this topic states that CA is one profession which, of late, is witnessing a significant spurt in the number of girls enroling and qualifying in C.A. examination and also figuring prominently in the top 50 Merit List. Some noteworthy information in the write-up is as under.

(i)    Ms. Shirin K. Engineer became the first woman CA 1933. She was followed by Ms. R. Shivabhogam in 1947 and Ms. Nilima Chatterjee in 1954.

(ii)    In November, 1983, Ms. Nandita P. (Shah) Parekh got the honour of becoming the first lady candidate to secure the first rank in C.A. Final Examination. She was followed by Ms. C. V. Sakunthala who secured first rank in May, 1984, Final Examination. Both these girls were awarded special prizes by our Prime Minister late Mrs. Indira Gandhi at a special function organised by the Institute. During the years 1989 to 2011, 14 girl candidates have secured the first rank in Final Examination. In May, 2011 Final Examination all the first three ranks have been secured by girls viz. Ms. Maitreyee Rajaput (Pune), Arti Jain (Bikaner) and Charmy Sheth (Mumbai).

(iii)    The membership of women in C.A. profession in the span of 16 years from 1995 to 2010 has increased from 5.21% in 1995 to 18% in 2010. The women membership increased from 3697 in 1995 to 29491 in 2011. The increase of women in part-time practice was from 541 to 1387, (b) full-time practice 1569 to 9139 and (c) not in practice 1587 to 18965.

 i) Audit of smaller entities: ICAI has prepared a note on the above subject which has been published on pages 453 to 465 of CA Journal for September, 2012. The Standards on Auditing, issued by ICAI, contain objectives, requirements and application and other explanatory material that are designed to support the auditor in obtaining reasonable assurance about the financial statements and express an appropriate opinion. The note prepared by ICAI explains the importance by using SA for Audit of small entities.

ii) Eligibility of paid assistant in CA firm Regulation 43 of Chartered Accountants Regulations has been amended w.e.f 1-8-2012, providing that the period of employment of paid assistant to the same firm of Chartered Accountants for the purpose of engagement of articled assistants 111 (2012) 44-b BCAJ has been increased from the present period of 12 months to 3 years. This notification is available on Institute Website (Page 518).

iii) New branches of students association The following two branches have been opened for Western India Chartered Accountants Students Association w.e.f. 4-7-2012 (Page 518). a) Gandhidham Branch of WICASA b) Solapur Branch of WICASA iv) Announcement for members in practice The following announcement has been published by ICAI (Page 518).

In continuation of the Announcement published in the February, 2011 issue of the C. A. journal at 1174, attention of the members in practice is hereby once again drawn to the resolution of the Council taken in December, 2010 required to be complied with, while responding to tenders or enquiries issued by various users of professional services.

In terms of the said Council decision, a member in practice responding to tenders and accepting professional work based thereon, is required to maintain a cost sheet incorporating therein details of the costs being incurred therein having regard to number of persons involved, hours to be spent, etc.

The said cost sheet is required to be submitted to the Institute, when so directed. Members concerned are required to take note of the above and ensure compliance, in their own interest.

Facts:

A company is an infrastructure company, which is developing, constructing, operating and maintaining an international airport. The company has in its Fixed Assets Register (FAR), various assets, which include buildings and other infrastructure assets used for the airport operations. Depreciation is provided on straight line method (SLM) based on the useful life of the assets in line with the rates prescribed under Schedule XIV to the Companies Act,1956 which are considered as the minimum rates.

The company has stated that after three years of commencement of operations, the company is planning to expand the existing terminal building in order to cater to the increase in passenger traffic movement. Due to this, portion/part of the existing building and other infrastructure assets may have to be demolished. The book value of those assets are of material amounts. Net realisable values arising from disposal of those assets are not material. This demolition is required exclusively for the expansion of the terminal building. Kind of assets demolished includes : (a) part of building, (b) escalators, (c) furniture and fittings and (d) electrical installations.

Query:

On the basis of the above, the company has sought the opinion of Expert Advisory Committee on the treatment of the above value of assets in the books of the company?

Opinion:

The Committee notes that in the company’s case, the fixed assets register is being maintained wherein the details of various assets, viz., buildings, escalators, etc. are being recorded separately and , therefore, the assets which are being demolished can be identified separately. Further, it is understood from the Facts of the Case that the existing assets are being demolished and there is no intention to refurbish such assets. Further, these assets will not be used in future.

The Committee is also of the view that there could be the possibility of a time gap between the time when these assets are retired from their active use and the time when these are demolished/ disposed off. The Committee, considering AS 10

 “Accounting for Fixed Assets”, is of the view that a fixed asset should be eliminated from the financial statements on disposal or when no further benefit is expected from its use and disposal. Further, as per the requirements of AS 10, when an already existing fixed asset is demolished for constructing a new asset, it is the derecognition principles of AS 10, which are to be first applied to the existing asset before recognition of a new asset, irrespective of the purpose for which it has been demolished/ disposed off. Accordingly, the Committee is of the view that on disposal/demolition of the existing fixed assets, the carrying amounts of the portion/items of the fixed assets demolished/disposed off, should be eliminated from the financial statements and the gain or loss on derecognition, i.e., the difference between the net disposal proceeds (if any) and the net book value of such fixed assets, should be recognised in the statement of profit and loss.

As regards capitalisation of book value of the demolished asset to the cost of new asset to be constructed, the Committee is of the view that although demolition/disposal of the existing asset may be necessary for the construction of new asset, the demolished asset is not part of the construction activity and accordingly, can not be said to be directly related to the specific asset or attributable to the construction activity in general. Therefore, the book value of the demolished/disposal of asset should not be capitalised as part of the cost of the new asset.

 (i) Issue: In a representation submitted to a company u/s. 225(3) of the Companies Act, 1956, the auditors of the company included the contribution made by the firm in strengthening the control procedures of the company during their association with the company. Is it misconduct? Para (i) under Clause (6) of Part 1 of the First Schedule to the CA Act, provides for scope of such representation, which an Auditor is entitled to make u/s. 225(3) of the Companies Act, 1956. This section permits a retiring auditor to make a representation in writing (not exceeding a reasonable length) to the company. The proposition of the partner to highlight contributions made by the firm in strengthening the control procedures in the representation should not be included in such representation because the representation letter should not be prepared in a manner so as to seek publicity. The Code of Ethics issued by the Institute makes it amply clear that the right to make representation does not mean that an auditor has any prescriptive right or a lien on an audit. The wording of his representation should be such that apart from the opportunity not being abused to secure needless publicity, it does not tantamount directly or indirectly to canvassing or soliciting for his continuance as an auditor. The letter should merely set out in a dignified manner how he has been acting independently and conscientiously through the term of office and may, in addition, indicate if he so chooses his willingness to continue as auditor if re-appointed by the shareholders. The representation proposed by the auditors could not be approved since, it may lead to his being held P. N. Shah H. N. Motiwalla Chartered Accountants icai and its members guilty of professional misconduct under Clause (6) of Part 1 of the First Schedule to the Act.

(ii) Issue:

Can a Chartered Accountant in practice, accept original professional work emanating from the client introduced to him by another member? Para (i) under Clause (6) of Part 1 of the First Schedule to the Act prescribes that a member 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.

(iii) Issue:

Whether a Chartered Accountant in practice can give public interviews and also whether he can furnish details about himself or his firm in such interviews? A Chartered accountant in practice can give public interviews. While doing so, due care should be taken to ensure that such interviews or details about the member or his/her firm is not given in a manner highlighting the professional attainments, which may hit clauses (6) & (7) of the First Schedule of the Act.

(iv) Issue:

 Whether a Chartered Accountant in practice can use expression like Income Tax Consultant, Cost Accountant, Company Secretary, Cost Consultant or a Management Consultant? Council direction under Clause (7) of Part 1 of the First Schedule to the Act which prescribes that it is improper for a Chartered Accountant to state on his professional documents that he is an Income tax Consultant, Cost Accountant, Company Secretary, Cost Consultant or a Management Consultant. However, it is permitted to mention his/her degrees.

(v) Issue:

Can a Chartered Accountant in practice give the date of setting up the practice or date of establishment on the letterheads and other professional documents, etc.? Council direction under Clause (7) of Part 1 of the First Schedule to the Act prescribes that the date of setting up of the firm on the letterheads and the professional documents, etc. should not be mentioned. However, in the Website, the year of establishment can be given on a specific “pull” request.

The Ethical Standards Board of ICAI has given answers to some ethical issues raised by our members. These are published on pages 388 to 390 of C. A. Journal for September, 2013. Some of these issues are as under:

Issue:
Can a Chartered Accountant in practice allow any person to practice in his name as a Chartered Accountant?

No, clause (1) of Part-I of the First Schedule to the CA Act prohibits a Chartered Accountant in practice to allow any person to practice in his name as a Chartered Accountant unless such person is also a Chartered Accountant in practice and is in partnership with or employed by him.

Issue:
Can a Chartered Accountant in practice pay to any person any share, commission or brokerage in the fees or profits of his professional business?

No, clause (2) of Part-I of the First Schedule to the CA Act prohibits a Chartered Accountant from paying or allowing any share, commission or brokerage in the fees or profits of his professional business, to any person other than a member of the Institute or a partner or a retired partner or the legal representative of the deceased partner or a member of any other professional body or with such other persons having such qualifications as may be prescribed, for the purpose of rendering such professional services from time to time in or outside India.

Issue:
Can a Chartered Accountant in practice share his fees with the Government in respect of Government Audit?

The Council considered the issue and while noting that the Government is asking auditors to deposit such percentage of their audit fee for recovering the administrative and other expenses incurred in the process, the Council decided that as such there is no bar in the Code of Ethics to accept such assignment wherein a percentage of professional fees is deducted by the Government to meet administrative and other expenditure.

Issue:
Can goodwill of a Chartered Accountant firm be purchased?

Yes. The Council of the Institute considered the issue whether the goodwill of a proprietary firm of a Chartered Accountant can be sold/transferred to another eligible member of the Institute, after the death of the proprietor concerned and came to the view that the same is permissible. Accordingly, the Council passed the Resolution that the sale/transfer of goodwill in the case of a proprietary firm of Chartered Accountants to another eligible member of the Institute, shall be permitted.

Issue:
Can a practicing Chartered Accountant secure any professional business through the services of a person who is not his employee or partner?

No, clause (5) of Part-I of the First Schedule to the C. A. Act prohibits a practicing Chartered Accountant from securing any professional business, either through the services of a person who is not an employee of such Chartered Accountants or who is not his partner.

Issue:
Can a practicing Chartered Accountant solicit clients or professional work by advertisement?

No. Clause (6) of Part-I of the First Schedule to the CA Act prohibits a practicing Chartered Accountant from soliciting clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means.

However, there are the following exceptions to it:

(i) A member can respond to tenders or enquiries issued by various users of professional services or organisations from time to time and securing professional work as a consequence.

(ii) A member may advertise changes in partnerships or dissolution of a firm, o r of any change in the address of practice and telephone numbers, the advertisement being limited to a bare statement of facts and consideration given to the appropriateness of the area of distribution of the newspaper or magazine and number of insertions.

(iii) A member is permitted to issue a classified advertisement in the Journal/Newspaper of the Institute intended to give information for sharing professional work on assignment basis or for seeking professional work on p a r t n e r s h i p basis or salaried employment in the field of accounting profession provided it only contains the accountant’s name, address, telephone, fax number and e-mail address.

Issue:
Whether member in practice is permitted to respond to announcement for empanelment for allotment of audit and other professional work and quote fees on enquiries being received?

It has been clarified by the Council under proviso (ii) to clause (6) of part-I of the first schedule of the CA Act that if announcements are made for empanelment by the Government, Corporations, Courts, Cooperative Societies, Banks and other similar institutions, members may respond to such announcements provided the existence of the panel is within their knowledge. The Council has further clarified that the quotations of fees can be sent, if enquiries are received by the members in this regard.

Issue:
Can a member in practice indicate in a book or an article, authored/contributed/published by him, his association with any firm of Chartered Accountants?

No, as per Para (e) under Clause(6) of Part I of First Schedule to the CA Act as appearing in the Code of Ethics, 2009, a member is not permitted to indicate in a book or an article, authored/contributed/ published by him, the association with any firm of Chartered Accountants.

EAC Opinion:

Amortisation of Land Right of Way:

Facts:
A company (hereinafter referred to as ‘the company’) is a Government company within the meaning of section 617 of the Companies Act, 1956. The shares of the company are listed with recognised stock exchanges. The company is engaged in the business of refining of crude oil and marketing of petroleum products. It has two refineries and lube blending/ filling plants. The company also has depots, installation and LPG plants across India, besides having administrative offices at Delhi, Chennai, Kolkata, Mumbai and other major cities.

The company owns pipelines for movement of petroleum products from one location to another for the purpose of stock transfer/sale. These pipelines are underground pipelines having sectionalising valve stations/intermediate pigging stations/ booster pumping stations in between. Products are pumped through these pipelines as and when movement of product is required and at any point of time, the pipeline is filled with the product. For the purpose of laying the pipelines, the company acquires ‘right of way’, i.e., right of use in land (ROU) under which such pipeline is to be laid. The right is acquired under the Petroleum and Minerals Pipelines (Acquisition of Right of User in a Land) Act, 1962, and vests absolutely with the company free from all encumbrances.

Though the ownership of the land under which the pipeline is laid continues with the land owner, the pipeline remains the property of the company. The company also has perpetual and absolute right to enter the land under which pipeline has been laid for the purpose of maintaining, examining, repairing, altering or removing any such pipeline or for doing any other acts necessary for any of the aforesaid purposes or for the utilisation of such pipeline. This enables the company to lay one or more pipelines. The land owner cannot construct any permanent structure or plant any tree having deep roots on this piece of land, though he can raise crops. According to the company, the ROU is an independent fixed asset as this right is absolute and perpetual as per the Petroleum and Minerals Pipelines (Acquisition of Right of User in Land) Act, 1962.

Query
In view of the above, the company has sought the opinion of the EAC on the issues: (i) Whether the current practice of the company not to amortise the land right of way as it is perennial in nature is correct; (ii) In case it is not correct, what should be the useful life to be considered for computing the amortisation in view of the fact that the right of way is perennial in nature?

Opinion
The Committee notes from the facts of the case and the Petroleum and Minerals Pipelines (Acquisition of Right of User in Land) Act, 1962 that the user’s right is restrictive for laying down and maintaining the pipelines and not unlimited for any purpose. Further, after considering AS–26  “Intangible Assets” particularly paragraph 68, the Committee is of the view that the useful life of an intangible asset is always finite, howsoever long and indefinite it may be. AS 26 does not justify non-amortisation; it only requires disclosures where the useful life is considered more than 10 years. It stipulates that the life has to be determined on a prudent and rational basis. The Committee also does not agree with the view of the company that the useful life of land right of way is infinite. In the view of the Committee, the useful life of the land right of way may be determined considering various technical, legal and economic factors, such as, useful life of petroleum reserves from which the petroleum products are being produced and then transported, technological changes in the transportation modes, alternative resources of energy, etc. The Committee is further of the view that as per the Standard, the useful life of the land right of way may be indefinite but it is not finite and, accordingly, the depreciable amount should be allocated on a systematic basis over the best estimate of its useful life. Therefore, the Committee is of the view that the current practice of the company not to amortise the land right of way is not correct. The Committee also wishes to point out that in case useful life of the intangible assets is determined to exceed more than 10 years, the company should provide reasons for such presumption as per the requirements of paragraph 94 of AS 26.

ICAI News:
The result of the Chartered Accountants Intermediate (IPC) Examination was declared on 31st July, 2013. The details of percentage of candidates passed in the said examinations are given below:

New Publications of ICAI

1. Handbook of Auditing Pronouncements 2013 Edition

2.  Revised–Guidance Note on Report under Section 92E of the Income-tax   Act, 1961 (Transfer Pricing)

3.  Trends and patterns in Public Finance: Theoretical and Empirical Aspect.

4.  Technical Guide on Auditing Waste Management.

In a recent order by ITA Tribunal in the case of Shri Vijay V. Meghani vs. DCIT, where there was a delay of 2,984 days in filing appeal against the order of CIT (A) due to misleading advice of a C.A. firm, the Hon’ble Members of the Tribunal have commented about the falling professional standards of ICAI Members. The author of this order being a Senior Chartered Accountant, the contents of this order should be an eye opener for all members of the C.A. profession and need introspection by our members. The relevant portion of the order in Para 9.6 is as under:

“9.6 However, if it is considered for a moment that the above said C.A. firm has really given such advice to the assessee herein and accordingly it has furnished the letter and affidavit, then, in our view, it may be showing signs of deteriorating standards with some of the Chartered Accountants in profession, which needs to be stopped on war footing by the ICAI. We have already noticed that the assessee is having connection with many tax professionals and, in all probabilities, the assessee might have had consultation with any one or more of them on the impugned problem. It is inconceivable that all the Chartered Accountants, whom the assessee might have had consultation or availed services, would have concurred with the view expressed by the above said C.A. firm. If it is presumed for a moment that all the C.A.s have concurred with the said view, then it only shows that the C.A. profession is losing its grip over the Income tax matters, which is another cause of concern for ICAI. The self study model with ‘on-site articled clerk training’ embedded in the Chartered Accountancy course aims to achieve high quality education and training through undergoing practical training, inculcating the habit of thinking, self introspection, application of mind, analytical ability etc. and they enable the C.A. students to have strong grip over the subjects and also to attain expertise in them. The commendable feature of the C.A. course is that, as stated earlier, the C.A. students are trained by the practicing Chartered Accountants during their articled clerk training program. Thus, the methodology adopted by the ICAI enabled the C.A. students to become a thorough professional with versatile knowledge and innovative mind. We notice that, in the recent past, the methodology of self study is given a go-by by some of the C.A. students and they have started depending more and more on the Commercial Coaching Centers, who undertake coaching of various subjects in the class room model. We notice that the ICAI does not appear to have taken steps to contain mushrooming growth of such coaching institutes, which indulge in manufacturing of Chartered Accountants through class room model, which may ultimately have undesirable effect on the quality of Chartered Accountants, since the habit of thinking, introspection, application of mind is replaced by spoon feeding, which kind of teaching discourages independent thinking. There should not be any controversy on the fact that the Chartered Accountants, till date, have occupied pioneer position vis-a-vis their counterparts in other parts of the World. They also contribute a lot to the building, sustenance and growth of our National economy. Any compromise on the quality of Chartered Accountants would not only affect our Country very badly, but is also expected to endanger the pioneer position enjoyed by the C.A. fraternity vis-a-vis their counter parts in other parts of the world. In our view, the ICAI should seriously taken note of these alarming practices emerging in our Country and should take appropriate corrective steps, lest the confidence reposed in C.A.s by the public should get diluted.”

Further, in Para 10 of the order it is observed as under

“Thus, it is seen that the advice claimed to have been given by the C.A. firm has been given without analysing the facts prevailing in the instant case and also without clear understanding of the provisions of the Act and their implications. We have also noticed that a C.A firm could not give such kind of advice, since it cannot forecast the outcome of an appeal filed before the Tribunal.We have already noticed that the CPE programmes have been designed by ICAI with the noble objective of enlightening the Chartered Accountants with current topics, current developments and such programmes are also aimed to continuous updating or refreshing of the knowledge of Chartered Accountants. The advice claimed to have been given by Chartered Accountants, if considered to have been really given, would create doubt about the efficacy of the CPE programmes, since such kind of advices is not expected from a Professional. Further these kind of advices claimed to have been given by a C.A. firm clearly give signals that the CPE programmes might have failed to achieve the desired objectives with some of the Chartered Accountants. It is high time that the ICAI should take note of these practicalities and should take corrective steps in order to maintain/restore the high standards and quality expected from a C.A professional.”

2. Some Ethical Issues

The Ethical Standards Board of ICAI has given answers to some Ethical Issues on pages 316 to 317 of C. A. Journal for September, 2014. Some of these issues are as under:

(i) Issue:

Can goodwill of a Chartered Accountant firm be purchased?

The Council of the Institute considered the issue whether the goodwill of a proprietary firm of a Chartered Accountant can be sold/transferred to another eligible member of the Institute, after the death of the proprietor concerned and came to the view that the same is permissible. Accordingly, the Council passed the Resolution that the sale/transfer of goodwill in the case of a proprietary firm of Chartered Accountants to another eligible member of the Institute, shall be permitted.

(ii) Issue: Can a Chartered Accountant in practice share his fees with the Government in respect of Government Audit?
The Institute came across certain Circulars/Orders issued by the Registrar of various State Co-operative Societies wherein it has been mentioned that certain amount of audit fee is payable to the concerned State Govt. and the auditor has to deposit a percentage of his audit fee in the State Treasury by a prescribed challan within a prescribed time of the receipt of Audit fee.

In view of the above, the Council considered the issue and while noting that the Government is asking auditors to deposit such percentage of their audit fee for recovering the administrative and other expenses incurred in the process, the Council decided that as such there is no bar in the Code of Ethics to accept such assignment wherein a percentage of professional fees is deducted by the Government to meet the administrative and other expenditure.

3. Financial Reporting Review Board (FRRB)

ICAI has published a “Study on Compliance of Financial Requirements.” Some of the observations from this publication are given below for information of Members.

(i) Contingencies and Events occurring after the Balance Sheet Date (AS-4)

From one of the Notes to Accounts given in the Annual Report of a company, it was noted that Advances were given to certain companies which had incurred losses and their net worth had eroded. These Advances were included under the heads of “Sundry Advances” or “Sundry Debtors” on the pretext that the management was confident of recovering these dues. Therefore, no provision was made.

Observation of FRRB (P. 37)

The erosion of net worth of the companies to whom advances were given itself indicated that the amounts due may not be fully recoverable. further, future events should be considered to confirm impairment of the asset rather than expecting its recoverability. If the net worth of the companies had eroded and they were incurring losses, provision should be made unless such companies have already entered into contracts to confirm profitability in future. Non-creation on provision in these cases is contrary to the requirements of AS-4.

(ii)    Provision for Taxation for Earlier years (AS-5)

From the statement of Profit and Loss given in the Annual report of a Company, it was noticed that the provision for taxation  for  earlier  years  was  adjusted  under  the  head “appropriations.”

Observation of FRRB (p42)

Adjustments arising due to prior period items should be included in the determination of net Profit or Loss for the current period instead of showing the same as “appropria- tion” of Profits. Income tax expense relating to prior years cannot be disclosed as appropriation of profits. Hence, the profit of the Company for the year is over stated and the Statement of Profit and Loss cannot be considered to be providing true and fair view of the profit of the busi- ness. accordingly, the company has not complied with the requirements of AS-5.

4.    EAC opinion

Accounting Treatment of Liquidated Damages on Unex- ecuted Portion of Contract.

Facts
A Central public sector enterprise, registered under the Companies act, 1956 was established for manufacturing of weapon systems required for Armed Forces.

The customers of the company recover liquidated damages for delayed delivery of goods, i.e., when goods are delivered after due date. the company makes provision for liquidated damages for the unexecuted portion of contract for the period of delay from due date of delivery till the date of the accounts. the company is following this practice as a prudent policy as liquidated damages amount is quantifiable and is a definite known liability. In most of the cases, the customer extends the due date, however, with levy of full liquidated damages. At the time of payment, the customer recovers the liquidated damages amount and pays the balance amount only.  Then, the company reverses the liquidated damages provision and debits to liquidated damages recovered account (ex- pense account).

Query
from  the  above  background,  the  Company  has  sought the opinion of the expert advisory Committee of the ICAI on the following issues:

(a) Whether the provision for liquidated damages should be made or not in respect of unexecuted portion of the contract for the period of delay from the due date of delivery till date of accounts? (b) Whether such provi- sion for liquidated damages is also required to be made in case the due date falls exactly on the last date of the accounts of the financial year, viz. balance sheet date, i.e., whether one day delay is to be reckoned or not?
(c) Whether the practice is to be spelt out as a ‘major Accounting Policy’ in terms of AS1 or will it be sufficient if a financial note is appended to the statement of profit and loss or even financial note is not required to  be appended?

EAC opinion:
The Committee notes that  in the  case  of the  company, liquidated damages are recovered by the customers for the period of delay between the due date of delivery of goods  and  the  actual  date  of  delivery.   Further,  as  per the Company, there is no clause in the contact to exit from the sales contract(s) entered with the customer, with or without the payment of penalty and the past experience of the company shows that in most cases, although the customers extend the due date of delivery, the liquidated damages are recovered in full. Accordingly, the Committee is of the view that the terms and conditions of the sales contract(s) are binding and legally enforceable by the customers. In the company’s case, although it is stated that the liquidated damages are in the nature of compensatory payment, the Committee is of the view that the liquidated damages are akin to penalty and there is a contractual obligation on the part of the company to pay for liquidated damages as soon as there is a delay in the delivery of goods beyond the due date as per the delivery schedule. Further, this obligation can not be avoided by the company’s future course of actions as it does not have any realistic alternative but to settle the contractual obligation (i.e., making the payment of such liquidated damages).  Thus,  there  exists  a  present  obligation  arising from past event, viz., delay beyond scheduled delivery and settlement of which is expected to result in an outflow of resources embodying economic benefits. Accordingly, the Committee is of the view that the company should recognise a provision in respect of liquidated damages for the period of delay between the due date of delivery of goods and the expected date of delivery of the said goods and not only for the period of delay till the date of financial statements, in the light of evidence provided by events occurring after the balance sheet date, as per paragraph 36 of AS29.

The Committee is of the view that ‘matching concept’ does not preclude recognition of present obligations as liabilities at the reporting date. the Company should disclose its accounting practice in respect of liquidated damages, considering the materiality of the items and transactions and their impact on the financial statements from the perspective of users financial statements.

[Pl. Refer page nos. 344 to 348 of C. A. Journal – September, 2014]

 
5.    ICAI news

(Note: Page Nos. given below are from C.A. Journal for September, 2014)

(i)    Database of Independent Directors:
Section 150 of the Companies Act, 2013 provides for creation and maintenance of data Bank of independent directors by recognised bodies. iCai has joined with institute of Company Secretaries and Institute of Cost Accountants to operationlise a repository for independent directors. mCa has approved this initiative of ICAI.  The Repository (http://independentdirector.in) will provide opportunity to individuals who are willing to act as independent directors in Companies.  Further, it will be possible for companies which wish to select independent directors to make use of this data Bank. (P.303)

(ii)    Revised    Dates    for    Campus    Placement Programme (P. 432)

It may be noted that the revised dates for campus Placement Programme for October, 2014, are as follows:

(iii)    Revised Minimum recommended Fees for Professional Services:

ICAI has revised minimum recommended fees which members can charge for various professional services. The details are given in CA Journal for September, 2014 (P. 424 – 430).

(iv)    Scheme for Enrolment of Overseas Citizens of India:

The Scheme for enrolment of Overseas Citizens of India (OCI) as members of ICAI has been finalised by ICAI. Under this scheme, an oCi holding professional accountancy qualification shall be recognised as a member of ICAI on completion of such examination, training and modules as listed in schedule ‘B’ to C.A. Regulations. Details of the scheme are published on P. 412-415 of C.A. Journal for September, 2014.

(v)    New ICAI Publication

Revised  Guidance  note  on  tax audit  u/s.  44aB  of  the income-tax act, 1961 (2014 edition)