Category: ICAI And Its Members

ICAI and Its Members

I. EXPOSURE DRAFT

1. RISK MITIGATION ACCOUNTING-PROPOSED AMENDMENTS TO IFRS 9 AND IFRS 7

The Exposure Draft sets out the proposed amendments to IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures. The IASB is proposing:

to add a risk mitigation accounting model for companies managing repricing risk on a net basis; and
to require a company to disclose its strategy for managing repricing risk and the effects of its risk management activities.

The IASB is also seeking feedback on the proposed withdrawal of IAS 39 Financial Instruments: Recognition and Measurement.

Public comments submission last date: May 22, 2026.

Download the Exposure Draft: https://resource.cdn.icai.org/90018asb-aps3657-1.pdf

Submit Comments:

Online (Preferred): http://www.icai.org/comments/asb/
Email: commentsasb@icai.in
Postal: ICAI, New Delhi

II. ICAI ANNOUNCEMENTS

1. PEER REVIEW PHASE IV EXTENSION

The Peer Review Board of the Institute of Chartered Accountants of India has announced a deferment of Phase IV of the Peer Review mandate, originally effective from 1 January 2026, to now be applicable from 31 December 2026. This extension applies to practice units (firms) that propose to undertake audits of branches of public sector banks and to those rendering attestation services with three or more partners, for whom obtaining a valid Peer Review Certificate will continue to be a pre-requisite before accepting statutory audits under the Phase IV coverage criteria.

Read Circular at: https://resource.cdn.icai.org/90105prb-aps3736.pdf

2. CLARIFICATIONS/FAQS ON THE ISSUES ARISING OUT OF THE PEER REVIEW MANDATE

The Peer Review Board of the ICAI has issued comprehensive clarifications and FAQs addressing key aspects of the Peer Review Mandate, including its phased applicability to practice units based on audit scope and firm size, such as statutory audits of listed entities or large unlisted public companies and assurance service thresholds under different phases. The guidance clarifies timing for obtaining a valid Peer Review Certificate before acceptance and signing of statutory audits, definitions of “raised funds” for applicability, and delineation of Public Interest Entities under the mandate. It also specifies the coverage of audits under Phase IV for branches of public sector banks, the requirement (or non-requirement) of peer review for non-attestation practices, and the scope of “assurance engagements” under applicable standards, along with practical points such as partner count reckoning and conditions for new units seeking peer review.

Read FAQ at: https://resource.cdn.icai.org/83571prb67450.pdf

III. ICAI PUBLICATION

1. FAQ ON THE NEW LABOUR CODE

The Accounting Standards Board has issued FAQs on key accounting implications arising from the New Labour Code to clarify key accounting questions arising from the application of the New Labour Codes.

Link to download the same is: https://resource.cdn.icai.org/90049asb-faq-nlc.pdf

2. TECHNICAL GUIDE ON EXPATRIATES TAXATION

The revised sixth edition of the Guide provides a comprehensive and updated analysis of the taxation and regulatory framework applicable to expatriates, covering determination of residential status under the Income-tax Act, 1961 (including deemed residency and expanded stay thresholds), implications for global income taxation, and practical aspects of the default tax regime under section 115BAC on expatriate salary structures. It offers detailed guidance on withholding obligations under section 195, taxability of salaries paid abroad for services rendered in India, and social security compliance under Indian law and bilateral Social Security Agreements, including coverage, contributions, and withdrawal rules. The publication also examines FEMA exchange control provisions, recent procedural changes such as electronic filing of Form 10F for DTAA claims, and compliance under the Black Money Act, 2015, making it a holistic reference for structuring and managing compliant expatriate assignments.

The technical guide is available at https://resource.cdn.icai.org/90288cit-aps3869.pdf

IV. OPINION

Accounting treatment of interest cost and interest income relating to interest-free subordinate debt

A. FACTS OF THE CASE

The Company is a joint venture between the Government of India (GoI) and the Government of NCT of Delhi (GNCTD) and is responsible for the construction and operation of the Delhi/NCR Metro Rail project. The project is financed through equity, grants, JICA loans routed through GoI, and interest-free subordinate debt provided by GoI, GNCTD and other government agencies.

The subordinate debt is meant specifically to finance land acquisition, rehabilitation and resettlement, and payment of central and state taxes. Repayment is scheduled in five equal instalments after completion of the JICA loan repayment, i.e., after 30 years.

Earlier, the Expert Advisory Committee (EAC) had advised the Company to fair value the interest-free subordinate debt as per Ind AS 113. Accordingly, during FY 2023-24, the Company measured such debt at fair value using G-sec rates and treated the difference between carrying value and fair value as a government grant, to be amortised over project life.

The Company accounted for interest using the effective interest method under Ind AS 109 as follows:

For completed phases (I–III): interest charged to P&L
For Phase IV (under construction): interest capitalised under CWIP
Interest earned on temporary investment of funds in flexi deposits was recognised as income in P&L, based on earlier EAC opinion (Query 44, Vol. XXXIV)

During the supplementary audit, C&AG objected that:

Interest is notional and should not be capitalised
Interest income should be netted off against borrowing cost
CWIP and equity were overstated by ₹1,621.49 lakh

Management disagreed and relied on Ind AS 23 and ICAI Educational Material to justify capitalisation and separate recognition of interest income.

B. QUERY

The Company sought EAC’s opinion on:

(i) Whether the accounting treatment of interest cost arising due to fair valuation of subordinate debt is correct.

(ii) Whether the accounting treatment of interest income earned on temporary investment of subordinate debt funds is correct.

C. POINTS CONSIDERED BY THE COMMITTEE

The Committee examined only the accounting issues relating to:

Interest arising on fair valuation of subordinate debt
Interest income on temporary investment of such funds

It relied on:

IND AS 109

Financial liabilities to be measured at amortised cost
Interest to be computed using the effective interest method
Interest so recognised is not notional, but accounting interest

IND AS 23 – BORROWING COSTS

Borrowing costs include interest computed using the effective interest method
Costs directly attributable to a qualifying asset must be capitalised
Metro project qualifies as a qualifying asset
Investment income earned during construction must be adjusted against borrowing cost

The Committee noted that the earlier EAC opinion cited by the Company was under the old AS framework, whereas the present case is under Ind AS, and therefore required independent evaluation.

It concluded that:

Interest arising due to fair valuation is the actual borrowing cost under Ind AS
Interest earned during construction must be set-off against borrowing cost and not credited to P&L.

D. Opinion

The Committee opined:

(i) Accounting treatment followed by the Company in respect of interest cost, viz., capitalising the same as capital work-in progress, is appropriate.

(ii) Accounting treatment followed by the Company in respect of interest income earned on temporary investment of subordinate debt funds in the statement of profit and loss is not appropriate; the same is to be set-off against the borrowing costs to be capitalised as per the principles of Ind AS 23.

Read Opinion https://resource.cdn.icai.org/90204cajournal-jan2026-30.pdf

ICAI Journal January 2026 Pages 113-119

V. DISCIPLINARY COMMITTEE CASES

1. Case: ROC, Kanpur vs. CA. G.G.W.

File No.: PR/G/295/2023/DD/437/2023/DC/2059/2025

Date of Order: 15.12.2025

Particulars	Details
Complainant	Registrar of Companies
Nature of Case	Certification of e-Form AOC-4 without due diligence – unsigned financial statements
Background	MCA conducted an inspection u/s 206(5) of the Companies Act, 2013, into several Producer Companies incorporated in Uttar Pradesh. It was found that 14 Producer Companies had filed e-Form AOC-4 for FY 2021–22, where the financial statements and directors’ reports were not signed by directors. Despite this, the Respondent, who was both a statutory auditor and certifying professional, certified these forms.
Key Allegations	– Certified AOC-4 forms, knowing that financial statements were unsigned by directors. – Uploaded unauthenticated financial statements without a mandatory UDIN. – Failed to comply with Section 134 of the Companies Act, 2013 and Rule 8 of Companies (Registration Offices & Fees) Rules, 2014.
Respondent’s Defence	– Admitted that unsigned financial statements were uploaded due to staff oversight. – Filed affidavits of directors and staff confirming inadvertent error. – Argued it was an unintentional mistake in the early stage of his career. – Claimed no fraud or misleading audit report was involved and sought leniency.
Findings	– Respondent pleaded guilty during the hearing on 19.09.2025. – Being a statutory auditor and certifying professional, responsibility rested solely on him. – Uploading unsigned financials and certifying AOC-4 without verification amounts to professional negligence. – Non-mention of UDIN further aggravated the lapse.
Charges Established	Guilty under Item (7), Part I, Second Schedule – failure to exercise due diligence / gross negligence.
Punishment	Reprimand under Section 21B(3)(a) of the CA Act, 1949.

2. CASE: REGIONAL DIRECTOR (ER), MCA, KOLKATA VS. CA. K.B.

File No.: PR/G/319/2020/DD/329/2020/DC/1856/2024

Date of Order: 22.12.2025

Particulars	Details
Complainant	Regional Director (Eastern Region), Ministry of Corporate Affairs, Kolkata
Nature of Case	Statutory auditor rendering prohibited non-audit services.
Background	The Respondent was a statutory auditor of Swapnabhumi Realtors Ltd. for FY 2017–18. During audit tenure, he also accepted a separate assignment for budget
	preparation and variance analysis of indirect expenses, for which separate fees were charged. The MCA alleged this amounted to an internal audit/management service, prohibited under Section 144 of the Companies Act, 2013.
Key Allegations	– Undertook variance analysis while continuing as a statutory auditor. – Charged separate professional fees (₹25,000). – Issued report containing recommendations on expense controls, amounting to an internal audit.
Respondent’s Defence	– Section 144 does not define “management services.” – Claimed analysis was done only to detect fraud and improve audit quality. – Argued independence was maintained as the audit report was qualified. – The stated internal auditor was already appointed, and he only used their work.
Findings	– Variance analysis report contained control recommendations, clearly falling within the scope of internal audit (refer to SA-610). – The assignment was independent of the statutory audit and carried out for separate consideration. – Respondent failed to resign despite accepting a prohibited assignment, violating independence norms.
Charges Established	Guilty under: Item (7), Part I, Second Schedule – lack of due diligence Item (1), Part II, Second Schedule – contravention of law/guidelines
Punishment	Fine of ₹10,000 payable within 60 days

3. Case: ROC, West Bengal vs. CA. RKT

File No.: PR/G/736/2022/DD/515/2023/DC/1897/2024

Date of Order: 22.12.2025

Particulars	Details
Complainant	Deputy Registrar of Companies, West Bengal
Nature of Case	Certification of false Form 10 – registration of charge for debentures
Background	During MCA inspection of M/s SAPL., it was found that the Respondent had certified Form 10 on 26.05.2010 for creation of charge to secure ₹1 crore debentures. However, the company’s audited balance sheet as on 31.03.2010 showed no fixed assets and current assets of only ₹4.01 lakh, creating a shortfall of over ₹95 lakh in security coverage. No mortgage deed was attached to the form.
Key Allegations	– Certified Form 10 without verifying ownership and adequacy of security. – Allowed registration of a charge despite the company having no assets. – Failed to ensure attachment of the mortgage deed.
Respondent’s Defence	Claimed his digital signature was misused and he was never engaged by the company; he relied on an FIR dated 28.04.2013 filed in another matter.
Findings	– FIR relied upon related to another company, and was filed 3 years after the impugned Form 10. – Respondent filed a fresh complaint for this case only in Nov 2024, almost one year after receiving notice from ICAI – treated as an afterthought (timeline table – page 5). – No effort was made by the Respondent to approach the company despite the alleged misuse. – Held responsible for the safe custody of his Digital Signature. – The committee concluded it was a clear case of negligence in certifying a false Form 10.
Charges Established	Guilty under Item (7), Part I, Second Schedule – failure to exercise due diligence / gross negligence.
Punishment	Reprimand and fine of ₹2,00,000 payable within 60 days.

ICAI and Its Members

I. EXPOSURE DRAFT

EXPOSURE DRAFT OF IND AS 119

NEW ACCOUNTING STANDARD FOR SUBSIDIARIES

The Institute of Chartered Accountants of India (ICAI) has issued an Exposure Draft of Ind AS 119, “Subsidiaries without Public Accountability: Disclosures,” aligned with the recently issued IFRS 19 by the International Accounting Standards Board.

Scope: The standard provides reduced disclosure requirements for eligible subsidiaries that:

Do not have public accountability
Have an ultimate or intermediate parent producing IFRS-compliant consolidated financial statements available for public use

Purpose: Eligible subsidiaries can apply these simplified disclosure requirements instead of the full disclosure requirements in other Ind AS standards.

Effective Date: Annual reporting periods beginning on or after April 1, 2027 (aligning with the global IFRS 19 effective date of January 1, 2027)

Public Comments Invited:

The Accounting Standards Board invites stakeholders to submit comments on the Exposure Draft by March 5, 2026.

Submit Comments:

Online (Preferred): http://www.icai.org/comments/asb/
Email: commentsasb@icai.in
Postal: ICAI, New Delhi

Download the Exposure Draft: https://resource.cdn.icai.org/89774asb-aps3404.pdf

This development is part of India’s ongoing convergence with international accounting standards, ensuring consistency with global financial reporting practices.

II. ICAI TOOLS

ICAI CAVALRY: PSYCHOMETRIC TEST ASSESSMENT SERIES

Empowering Professional Excellence through Skill Assessment-ICAI CAvalry: Psychometric Test Assessment Series to assess the various Skills possessed by the Members of ICAI

ICAI has launched ICAI CAvalry, a comprehensive Psychometric Test Assessment Series designed to enhance the holistic development of Chartered Accountants by focusing on critical behavioural and cognitive competencies beyond technical expertise. In the modern professional landscape, technical proficiency alone is insufficient. Future-ready CAs must demonstrate leadership, influence, negotiation, and impactful communication skills while navigating complex business environments. This initiative addresses the need for professional agility, leadership, and resilience.

Skills to Be Covered: The series encompasses 18+ high-impact competencies. The assessments will rotate across the high-impact psychometric factors dealing with the skills such as Branding Skills, Communication Skills, Critical Thinking Skills, Design Thinking Skills, Emotional Intelligence, Entrepreneurial Skills, Interpersonal Skills, Leadership Skills, Listening Skills, Negotiation Skills, Networking Skills, Problem-Solving Skills, Public Speaking Skills, Team Building Skills, Time Management Skills, Work Ethics, Decision-Making Skills, New-Age Professional/Technological Skills, any other Skills

1^st Psychometric Test Assessment to assess the Branding & Communication Skills

https://docs.google.com formsd/e/1FAIpQLSfwfTQum_kPSwlnwtDHx1djTbqJjLHi7naW0ERm4Vms0OXApQ/viewform

2^nd Psychometric Test Assessment to assess the Critical and Designing Thinking Skills

https://docs.google.com/forms/d/e/1FAIpQLSeog5QP681yTVut02MgCehWDmlh-i_-Fu_6RMvyusHQHMKV6g/viewform

III. ICAI PUBLICATION

1. New Research Publication on Accounting for Digital Assets

The ICAI has published a comprehensive research report titled “Accounting for Digital Assets” addressing the emerging challenges in accounting for blockchain-based assets, cryptocurrencies, NFTs, and other digital instruments. The report analyses the global accounting landscape through IFRS, FASB, and Ind AS perspectives, with particular focus on regulatory gaps in India’s framework. It identifies core challenges in classification, recognition, measurement, and disclosure of digital assets under existing standards such as IAS 2, IAS 32, and IAS 38. The research provides empirical insights, expert opinions, and policy recommendations for standard setters, regulators, and businesses navigating this complex space. A key finding highlights that current accounting standards inadequately capture the unique nature and behaviour of digital assets, emphasizing the need for tailored recognition, measurement, and disclosure practices. This timely publication offers essential guidance to accounting professionals dealing with the complexities of the rapidly evolving digital asset ecosystem.

Link: https://resource.cdn.icai.org/89848research-aps3482-final-acc-for-digital-assets.pdf

2. RESOURCE MATERIAL ON PUBLIC PROCUREMENT

The ICAI Research Committee has published a comprehensive Resource Material on Public Procurement, recognising its critical role as the cornerstone of good governance and economic efficiency. Public procurement serves as a vital link between the utilisation of public funds and the delivery of goods, works, and services to citizens. As governments worldwide strive to ensure transparency, accountability, and value for money in public spending, this resource material provides professionals and policymakers with an essential understanding of procurement processes. The publication offers a detailed overview of conceptual, legal, and procedural aspects of public sector procurement, covering the Indian regulatory framework including General Financial Rules and Government Procurement Manuals, alongside international best practices from UNCITRAL, WTO (GPA), and the World Bank. This comprehensive guide equips stakeholders with the knowledge needed to navigate the complexities of public procurement effectively.

Link: https://resource.cdn.icai.org/89849research-aps3482-icai-sm-public-procurement.pdf

IV. EXPERT ADVISORY COMMITTEE OPINION

Accounting treatment of salary paid to staff/employees and cost related to food trials during testing phase prior to opening of a new restaurant, under Ind AS framework.

A. FACTS OF THE CASE

The Company is a private company incorporated in India and is engaged in owning and operating contemporary and fine-dine luxury restaurants under various brands. The Company typically opens 8–10 new restaurant outlets every year across India. In order to maintain uniform standards of food quality, ambience, lighting, cooling and service quality across all outlets from the first day of operations, the Company conducts food and beverage trials prior to opening a new outlet.

The Company installs various machinery and equipment in each outlet, such as kitchen equipment, air-conditioning systems, walk-in freezers, audio-visual equipment, lighting and ambience control systems, exhaust systems, STP plants, furniture and fixtures, IT systems, etc. Food and beverage trials, testing and calibration of equipment take about one month. For this purpose, personnel are recruited in advance to test and handle equipment and to prepare for the opening of the outlet.

The Company proposed to capitalise (i) employee benefit costs incurred during the testing phase and (ii) food and beverage material costs incurred during trial runs as part of the cost of construction of the outlet, relying on paragraphs 7, 16 and 17 of Ind AS 16 – Property, Plant and Equipment.

B. QUERY

Whether the accounting treatment proposed by the Company, i.e., capitalising:

(i) employee benefit costs, and

(ii) food and beverage material costs,

incurred during the testing phase prior to opening a new restaurant outlet, as part of the cost of property, plant and equipment under Ind AS 16, is correct.

C. POINTS CONSIDERED BY THE COMMITTEE

The Committee examined the issue solely from the perspective of Ind AS, particularly Ind AS 16. It noted that Ind AS 16 does not prescribe a single unit of account for PPE and that a restaurant outlet as a whole is generally not considered an item of PPE. Instead, individual assets such as kitchen equipment, air-conditioning systems, lighting systems, furniture, etc., constitute separate items of PPE.

The Committee emphasised that only costs directly attributable to bringing a specific asset to the location and condition necessary for it to operate as intended by management can be capitalised. Costs relating to opening a new facility, conducting business in a new location, or staff training are specifically excluded from capitalisation.

With respect to employee benefit costs, the Committee observed that salaries paid to chefs, kitchen staff and service personnel during trials were incurred to ensure consistency in service quality and customer experience, and not for construction or acquisition of any specific PPE. However, costs of technicians engaged during the testing phase for resolving technical issues necessary to make specific equipment operational could be capitalised, if clearly identifiable.

Regarding food and beverage material costs, the Committee noted that trial runs were conducted to standardise taste, presentation and consistency, and not to test whether equipment was capable of operating. Since the equipment was already capable of operating as intended, such costs did not add value to any specific asset and could not be considered directly attributable to PPE.

D. EAC’S OPINION

The Committee opined that capitalisation of employee benefit costs and food and beverage material costs incurred during the testing phase prior to opening a new restaurant outlet is not appropriate.

However, if it can be clearly demonstrated that a portion of employee benefit costs relates to technicians engaged in resolving technical operational issues necessary to bring specific PPE to the condition required for operation, such costs may be capitalised to that extent. All other employee benefit costs and food and beverage trial costs should be expensed as incurred.

Read Opinion in ICAI’s The Chartered Accountants December 2025 pages 131-135

Link: https://resource.cdn.icai.org/89673cajournal-dec2025-35.pdf

V. ICAI BOARD OF DISCIPLINE’S ORDERS

1. Case : Sh. Gajendra Prasad Panda vs. CA. A.K.P.

File No. : PR/836/2022/DD/34/2023/BOD/750/2024

Date of Order : 08.12.2025

Particulars	Details
Nature of Case	Alleged unauthorised conduct of tax audit and obstruction of incoming auditor
Background	The Respondent had earlier acted as statutory auditor of the Complainant. After deterioration of professional relations, the Complainant decided to change the auditor. It was alleged that despite cessation of engagement, the Respondent forcibly added himself as auditor on the Complainant’s Income-tax portal and conducted the tax audit for FY 2021–22 without authorisation, and thereafter wrote to the incoming auditor advising him not to accept the assignment.
Key Allegations	– Unauthorised addition of Respondent’s name on the assessee’s Income-tax portal and conduct of tax audit for FY 2021–22 without consent. – Writing to the incoming auditor claiming completion of audit and alleging non-payment of tax liabilities by the Complainant, thereby attempting to obstruct change of auditor.
Respondent’s Defence	– Allegations were mala fide and triggered by his refusal to issue an unqualified audit report contrary to law. – He had completed the audit and issued a qualified report based on professional judgment and advised payment of additional tax. – Communication to incoming auditor was factual, made in professional courtesy, without any intent to threaten or obstruct.
	– After his DSC was taken by the Complainant’s representatives without authority, he did not upload the audit report and had no further role.
Findings	– The allegation of unauthorised addition on the Income-tax portal was already dropped at the prima facie stage by the Director (Discipline). – On the surviving charge relating to communication with the incoming auditor, the Board found no evidence of malafide intent, threat, or obstruction. – The Respondent’s explanation was found credible and corroborated by surrounding circumstances. – Mere communication of factual position to an incoming auditor does not constitute misconduct.
Charges Established	None – No misconduct under Item (2), Part IV, First Schedule to the CA Act, 1949.
Decision	Not Guilty

2. Case : CA. MNJ vs. CA. SSS

File No. : PR/54/2018/DD/63/2018/BOD/756/2024

Date of Order : 08.12.2025

Complainant	Alleged lack of fairness and transparency in conduct of ICAI branch elections
Background	The Respondent acted as Returning Officer for elections to the Managing Committee of the Satara Branch of WIRC of ICAI for the term 2016–2019. The Complainant alleged that the Respondent manipulated the election process to enable certain candidates to be elected unopposed by improperly accepting withdrawal of nominations after the prescribed deadline.
Particulars	Details
Key Allegations	– Respondent pressurised certain candidates to withdraw nominations. – Withdrawal forms were emailed after the stipulated cut-off time of 6:00 PM on 29.01.2016. – Despite absence of a valid withdrawal by one candidate, the Respondent displayed a final list of six candidates (equal to available seats) and declared them elected unopposed. – Conduct allegedly lacked fairness and transparency, amounting to other misconduct.
Respondent’s Defence	– No statutory rules or binding guidelines prescribe the manner of withdrawal of nominations in ICAI branch elections. – Both concerned candidates had communicated their intention to withdraw telephonically before the deadline, on speakerphone, in the presence of branch officials. – Actions were taken in good faith to ensure smooth conduct of elections and avoid unnecessary delay or expense. – Complaint suffered from delay and issues of locus standi.
Findings	– Witnesses (including the concerned candidates and Branch In-Charge) confirmed on oath that withdrawal intentions were communicated telephonically before the deadline. – No evidence of mala fide intent or manipulation by the Respondent was established. – In absence of any clear statutory procedure for withdrawal of nominations, reliance on telephonic confirmation, in good faith, could not be faulted. – The Complainant himself committed errors in invoking a non-existent clause in the complaint.

Particulars

Details

Charges Established

None – No other misconduct under Item (2), Part IV, First Schedule to the CA Act, 1949.

Decision

Not Guilty

3. Case : Shri AG vs. CA. VT

File No. : PR/452/2022/DD/449/2022/BOD/769/2024

Date of Order : 08.12.2025

Complainant :	Shri AG, Director – M/s LFS Pvt. Ltd.
Nature of Case	Alleged acceptance of statutory audit without prior written communication with previous auditor
Background	The Respondent was appointed statutory auditor of the company for FYs 2020–21 to 2022–23. The Complainant alleged that the Respondent accepted the audit without obtaining a written No Objection Certificate (NOC) from the previous auditor, exerted pressure to procure the NOC, retained company documents, failed to resign formally, and did not file Form ADT-3, thereby obstructing appointment of a new auditor.
Key Allegations	– Accepted audit assignment without written communication/NOC from previous auditor.
Particulars	Details
	– Pressurised the company to obtain NOC and threatened discontinuation of audit work. – Failed to formally resign and to file Form ADT-3, allegedly blocking appointment of another auditor.
Respondent’s Defence	– Previous auditor had no objection; verbal NOC was received through a professional intermediary and later confirmed in writing. – Dispute arose due to non-payment of audit fees (₹9,500 outstanding). – Allegations were motivated to avoid payment; any lapse was procedural and bona fide.
Findings	– The complaint was filed without a valid Board Resolution authorising initiation of disciplinary proceedings on behalf of the company.
	– The purported resolution was found to be an afterthought and not a valid authorisation. – In absence of statutory authorisation, the complaint was void ab initio; merits were not examined.
Charges Established	None
Decision	Not Guilty; complaint dismissed and case closed under Rule 15(2).

ICAI and Its Members

I. ICAI ANNOUNCEMENTS

1. SUGGESTIONS ON REVISED ICAI CODE OF ETHICS

The 12th edition of the ICAI Code of Ethics was issued with effect from July 1, 2020. Due to changes then, revisions have been proposed in the Code of Ethics. The Exposure Drafts of Code of Ethics may be accessed at:-

Volume-I – https://resource.cdn.icai.org/89062esb-coe-v1.pdf

Volume-II – https://resource.cdn.icai.org/89063esb-coe-v2.pdf

Volume-III – https://resource.cdn.icai.org/89064esb-coe-v3.pdf

A brief summary of the key changes proposed in comparison to the existing 12th edition of Code of Ethics is enclosed as Annexure A [https://resource.cdn.icai.org/89065esb-coe.pdf]

Inputs/suggestions/comments/feedback on the Exposure drafts are called at esb@icai.in / ashishswaroop@icai.in latest up to 26th November, 2025.

The comments may alternatively be submitted on https://forms.office.com/r/CunNrHqpck?origin=lprLink

2. NOMINATIONS FOR CA WOMEN EXCELLENCE AWARDS

The Women & Young Members Excellence Committee (WYMEC) of ICAI is organizing 3rd CA Women Excellence Awards. Last date to submit the nomination form is 30th November 2025. Award categories are:

CA Women Life Time Achievement Award
CA Women Independent Direct Award
CA Women of the Year Award
CA Women in Social Service Award
CA Women Startup Award

For filing Nomination form, please visit: https://cawomenawards.icai.org/

II. OPINION

Accounting treatment of expenditure towards Special Development Plan by the Company, under Ind AS framework

1. FACTS OF THE CASE

A special purpose vehicle owned by government of Karnataka executes large-scale irrigation and drinking-water projects. Apart from its core projects, it undertakes Special Development Plan (SDP) works viz. construction of barrages, check dams, roads, bridges, community halls, and other infrastructure—funded through budgetary allocations treated as ‘advance against equity’, subsequently converted into share capital.

The Company does not own or control the assets created under SDP. These are handed over to the Government upon completion. Since FY 2017-18, the Company has been charging SDP expenditure to the Statement of Profit and Loss, considering the absence of future economic benefits. Statutory auditors have qualified this treatment as incorrect, while the C&AG has endorsed the revenue-expense treatment.

2. QUERY

Given the divergent views of the statutory auditors and the C&AG, the Company sought guidance from the Expert Advisory Committee (EAC) on:

Whether treating expenditure on SDP works—assets not owned by the Company, as revenue expenditure is appropriate under Ind AS.
If not appropriate, what the correct accounting treatment should be.

The issue is restricted specifically to the SDP-related expenditure.

3. POINTS CONSIDERED BY THE COMMITTEE

The EAC analysed the issue strictly under the Ind AS Conceptual Framework.

Key considerations included:

Definition of an asset: Requires (a) a right, (b) control over the resource, and (c) the potential to produce economic benefits.
Control: The Company does not control the SDP assets; nor does it have any right to direct their use or obtain economic benefits.
Function: The Company functions as an implementing agency for SDP works; although funds are structured as equity, source of funding does not determine expenditure classification.
Impact on other Assets: The SDP expenditure does not contribute to the creation or enhancement of any other recognisable asset of the Company under Ind AS 16 or Ind AS 38.

Accordingly, SDP expenditure fails the asset recognition criteria.

4. OPINION

The accounting treatment followed by the Company—charging SDP expenditure to the Statement of Profit and Loss—is appropriate and compliant with the Ind AS framework.
As the existing treatment is correct, the question of an alternative accounting method does not arise.

This position aligns with the view of the C&AG and is grounded in the fundamental asset-recognition principles of the Conceptual Framework.

ICAI Journal November 2025 Pages 111-116

Link: https://resource.cdn.icai.org/89217cajournal-nov2025-31.pdf

III. DISCIPLINARY COMMITTEE CASES

Case : Deputy Director of Income Tax (Inv.), Chennai vs. CA. S.S.M.G.

File No. : PR/G/428C/2019/DD/102/2020/DC/1870/2024

Date of Order : 12.11.2025

Particulars	Details
Complainant	Deputy Director of Income Tax (Inv.), Chennai
Nature of Case	Alleged lack of due diligence in issuing multiple Form 15CB certificates
Background	The Income Tax Investigation Wing recorded statements under section 131 revealing that the Respondent during the period of May 2017 to March 2018 had issued 470 certificates in Forms 15CB certificates to two travel companies, facilitating remittances totaling approx. ₹849.83 crore. It was alleged that these certificates were issued without adequate verification of underlying agreements or documents.
Key Allegations	-Issued Form 15CB without examining mandatory documents such as agreements, supporting travel documents, and invoices.- Relied only on proforma invoices, passenger lists, and declarations.- Enabled substantial foreign remittances without ensuring tax compliance.-Failed to exercise due diligence, attracting Item (7), Part I, Second Schedule.
Respondent’s Defence	-Form 15CB requires examination of the nature of remittance and TDS applicability, not verification of genuineness of underlying commercial transactions.- Verified incorporation papers, foreign invoices, passport-based passenger lists, FEMA declarations, and bank remittance requests.- Stated transactions were not taxable as foreign travel agencies had no PE in India.-Relied on: (a) Madras High Court decision in Murali Krishna Chakrala¹ holding CAs are not required to test document genuineness; (b) ICAI’s own decision in another case order dated 05 February 2024.
Findings	-On appreciating the various requirements in the form it was observed Form 15CB requires verification of documents for TDS determination only; CA is not expected to assess the genuineness of the actual business transaction.- No statutory mandate to verify every underlying travel document; obligation arises only where suspicion is apparent.- Respondent examined all available documents and acted within the limits of Form 15CB.-No evidence of her involvement in any subsequent misuse by the clients.
Charges Established	None – No misconduct under Item (7), Part I, Second Schedule.
Decision	Not Guilty

1 [2022] 145 taxmann.com 248 (Madras). Supreme Court has dismissed SPECIAL
LEAVE PETITION (CRIMINAL) Diary No(s). 8123/2024 Order dated 18-3-2024

2. Case : ROC, Delhi & Haryana vs. CA. M.J.

File No. : PR/G/167/2022/DD/101/2022/DC/1894/2024

Date of Order : 18.08.2025

Complainant	Deputy Registrar of Companies, NCT of Delhi & Haryana
Nature of Case	Filing incomplete statutory financial statements on MCA Portal
Background	During inspection of J, the ROC found that the company had filed Balance Sheets for FYs 2010–11 to 2013–14 on the MCA portal without attaching any schedules, though Form 23AC certification by the Respondent stated that all required attachments had been verified and enclosed.

Particulars	Details
Key Allegations	-Respondent certified e-Form 23AC for four years without verifying completeness of Balance Sheets.- Declared that all attachments were checked and enclosed, although schedules were missing.- Failed to ensure completeness despite explicitly certifying compliance under the Companies Act.
Respondent’s Defence	-Forms were received from the auditee already filled and signed; omission occurred due to oversight.- Respondent suffered from health issues at the time, resulting in human error.- Asserted that the omission was unintentional and not a case of gross negligence.
Findings	-Declaration in Form 23AC expressly states that the CA has verified completeness of attachments.- Respondent failed to perform this basic and mandatory verification.- Health issues or reliance on documents sent by client do not dilute statutory responsibility.-Misconduct under Item (7), Part I, Second Schedule established.
Charges Established	Item (7), Part I, Second Schedule – Failure to exercise due diligence/gross negligence.
Punishment	Reprimand under Section 21B(3) of the Chartered Accountants Act, 1949.

3. Case : Jammu & Kashmir Bank Ltd. (Informant) vs. CA. S.K.

File No. : PPR/333/2016/DD/003A/INF/17/2020/DC/1261/2020

Date of Order : 23.09.2025

Complainant:	J&K Bank Ltd.
Particulars	Details
Nature of Case	Failure to detect and report massive LC discounting fraud during concurrent audit
Background	The Respondent was appointed as Concurrent Auditor of J&K Bank’s RP Branch for May 2014–April 2015. A major fraud later uncovered at the branch revealed fake and fabricated Letters of Credit (LCs) amounting to ₹29.22 crore forming part of an overall fraudulent exposure of higher amount. Investigation showed discounting of LCs issued on plain paper, manual handling of LCs bypassing SFMS, and use of newly opened accounts to route fraudulent transactions.
Key Allegations	-Failed to report material irregularities in discounting of LCs, including one-day issuance/acceptance/discounting patterns.- Ignored manually issued LCs lacking authentication, contrary to bank policy.- Reported “No Record Found” for critical LC-related areas despite high-value exposures.-Did not escalate non-availability of records or suspicious activity to bank management.-Failed to examine internal branch books which showed large outstanding amounts.
Respondent’s Defence	-Fraud was perpetrated by Branch Manager in collusion with clients; documents appeared genuine.- LC acknowledgments and dispatch were routinely manual at the branch; hence no red flag arose.-Internal auditors also failed to detect the fraud.-Produced working notes and claimed 167 instances of adverse remarks across reports.
Particulars	Details
	-Maintained that concurrent auditors cannot detect management-driven fraud under SA 240.
Findings	-Concurrent auditor must verify both documents and internal branch records, especially for material transactions like LCs.- Respondent failed to comment even once on LC discounting during the audit period.- “No Record Found” is insufficient where high-value LCs existed and were discounted through newly opened accounts.-Serious irregularities (manual LCs on plain paper, absence of SFMS usage, new accounts used for discounting) should have raised suspicion.-Non-availability of records should have triggered escalation, not reliance on automated outputs.-Failure to detect or report these red flags amounted to lack of due diligence and gross negligence.
Charges Established	Guilty under Items (5), (6), (7) & (8) of Part I, Second Schedule – (ii)failure to disclose material facts, (iii)failure to report misstatements, (iv)gross negligence/lack of due diligence, (v)failure to obtain sufficient information.
Punishment	Reprimand and fine of ₹2,00,000, payable within 60 days.

ICAI and Its Members

I. ICAI PUBLICATIONS

1. ISSUANCE OF CERTIFICATES BY CHARTERED ACCOUNTANTS

This publication addresses the critical role of certificates issued by Chartered Accountants in today’s complex regulatory and business landscape. Recognizing that CA certificates have evolved beyond mere compliance attestations to become vital instruments of trust that influence decisions of regulators, financial institutions, investors, and other key stakeholders, this comprehensive guide provides essential guidance to the profession.

The publication offers systematic and practical direction on the audit procedures required for certificate issuance while prescribing the fundamental elements that must be incorporated in every certificate. It thoroughly examines various types of certificates, their requisite contents, applicable standards, and ethical considerations, thereby enabling practitioners to fulfill their responsibilities with clarity, confidence, and due diligence. It provides various illustrative certificates like Net worth certificate for Visa, share capital and shareholding pattern, certificate on ITR Acknowledgment, Computation of Annual Turnover etc.

2. TECHNICAL GUIDE ON DISCLOSURE AND REPORTING OF KEY PERFORMANCE INDICATORS (KPIs) IN OFFER DOCUMENTS (REVISED 2025)

This Revised Technical Guide, issued by the Auditing and Assurance Standards Board, serves as a comprehensive reference for disclosing and reporting Key Performance Indicators (KPIs) in offer documents during securities issuances.

KEY COMPONENTS

For Issuer Companies

The guide provides detailed instructions on:

How to disclose KPIs in offer documents
Compliance with ICDR (Issue of Capital and Disclosure Requirements) Regulations
Adherence to ISF (Industry-Specific Framework) KPI Standards
Proper presentation and formatting of KPI information

For Practitioners (Auditors / Assurance Professionals)

The guide offers comprehensive guidance on:

Reporting requirements for KPI assurance engagements
Professional responsibilities when examining KPIs
Illustrative report formats for standardised KPI reporting
Technical aspects of verification and validation procedures

ROLE CLARIFICATION

The guide clearly delineates responsibilities among three key parties:

Bankers – Their role in the offer document process
Issuer Companies – Primary responsibility for KPI disclosure accuracy
Practitioners – Independent verification and reporting obligations

Link: https://resource.cdn.icai.org/88743aasb-aps2729.pdf

3. BASICS OF INTERNATIONAL TAXATION – A GUIDE

The guide systematically covers critical areas including double taxation avoidance, tax treaties, taxation of non-residents, transfer pricing mechanisms, base erosion and profit shifting (BEPS), and contemporary challenges in e-commerce taxation. Structured across eight detailed sections, the book progresses from foundational economic principles of international trade and tax treaty frameworks to more complex technical aspects of cross-border taxation.

This edition has been thoroughly updated to reflect amendments introduced by the Finance Act, 2025, ensuring alignment with the latest provisions of the Income-tax Act, 1961. The guide serves as an essential resource for practitioners seeking to understand and navigate the evolving landscape of international tax law and practice.

Link: https://resource.cdn.icai.org/88232cit-aps2322-basic-int-guide.pdf

II. EXPERT ADVISORY COMMITTEE OPINION

Accounting for GST Component Paid on Lease Payment under Ind AS 116, “Leases”

Background:

A public sector power generation company had leased its Delhi corporate office premises from one of its joint venture partners. The lease was for three years (Nov 2023–Oct 2026) with monthly rent of plus 18% GST, and annual escalation of 5%. Since the company’s output (electricity) is exempt under GST, it could not claim input tax credit on GST paid on lease rentals.

During C&AG’s supplementary audit, the auditors observed that the company had incorrectly included GST in the computation of the right-of-use (RoU) asset and lease liability under Ind AS 116. C&AG referred to the ICAI’s Educational Material (January 2020), which clarifies that GST should not form part of lease payments.

COMPANY’S VIEW:

The company argued that since it could not claim input credit, the GST paid was a real, non-recoverable cost. Excluding it would distort the presentation of lease expenses, as expensing it separately in the Profit & Loss account might misleadingly appear as an additional lease. It contended that the Educational Material is only recommendatory.

EAC’S ANALYSIS:

The Expert Advisory Committee (EAC) examined the issue solely from an accounting perspective and referred to the following principles under Ind AS 116:

Paragraph 23–26: The RoU asset equals the initial measurement of lease liability, based on the present value of lease payments made to the lessor.
Definition of “Lease Payments”: Payments relate to the right to use the asset—fixed payments, variable payments linked to an index or rate, etc.

The EAC also examined the nature of GST under Indian law:

GST is a consumption-based levy imposed by the Government on the recipient of services.
The lessor merely acts as a collection agent for the Government.
Hence, GST is not a payment made to the lessor for the right to use the asset, but a statutory levy payable to the Government.

As per Appendix C to Ind AS 37 (“Levies”), GST constitutes an outflow imposed by law and not a lease payment. Therefore, it does not meet the definition of a component of the lease liability or RoU asset.

EAC’s Opinion:

GST payments made by the lessee cannot be included in the measurement of the right-of-use asset or lease liability under Ind AS 116.

Even if the lessee cannot claim input tax credit (as in this case of exempt electricity supply), the GST is still a government levy, not a lease payment. Consequently, the GST component should be charged to Profit & Loss when incurred.

The Chartered Accountant, October 2025, p. 117–120 (Opinion of the Expert Advisory Committee, ICAI

Link: https://resource.cdn.icai.org/88520cajournal-oct2025-31.pdf

III. ICAI DISCIPLINARY COMMITTEE ORDERS

1. Case: ROC, Mumbai vs. CA. A.J.

File No. PR/G/87C/22-DD/441/2022/DC/1801/2023

Date of Order: 23.09.2025

Particulars	Details
Complainant	Registrar of Companies, Ministry of Corporate Affairs, Mumbai
Nature of Case	Professional Misconduct – signing audit report without directors’ approval/signature on financial statements
Background	The complaint arose from a larger MCA investigation where dummy directors and forged incorporation documents were used by several companies. The respondent, as statutory auditor of M/s C for FY 2018–19, was alleged to have signed the audit report on financial statements that were not signed or approved by any directors, violating Section 134 of the Companies Act, 2013.
Key Allegations	The respondent signed the financial statements of the company without approval/signature of the board or directors. – The uploaded financials on MCA portal contained only the auditor’s signature. – The respondent later produced another set of financials with director signatures, which were found to be fabricated to cover up the defect.
Respondent’s Defence	Claimed that financials were handed to company officials for obtaining directors’ signatures and his firm was not responsible for MCA filing. – Alleged that his signature on the uploaded version was forged, but admitted he filed no police complaint. – Submitted that any omission was clerical and unintentional; assured the committee it would not recur.
Findings	– The committee found contradictory statements by the respondent and inconsistencies in documents produced. – Comparison of financial statements revealed differences in the audit stamp size and layout, confirming post-facto fabrication. – Held that he failed to ensure compliance with Section 134 of the Companies Act, 2013, by signing unauthorised financial statements. – Found guilty under Item (7) of Part I of Second Schedule – failure to exercise due diligence and gross negligence.
Punishment	Reprimand and fine of ₹25,000 to be paid within 60 days (Section 21B(3) of the CA Act, 1949).

2. Case: ROC, Mumbai vs. CA. D.S.

File No.: PR/G/88A/2022-DD/446/2022/DC/1701/2022

Date of Order: 21.09.2025

Particulars	Details
Complainant	Registrar of Companies, Mumbai
Nature of Case	Alleged lack of due diligence in certifying Form INC-32 (SPICe Form) – incorporation of M/s A
Background	The ROC alleged that during physical verification in January 2022, the company was not found operating at its registered office address, though the respondent had certified the incorporation Form INC-32 on 22.03.2017 declaring that he had personally verified the premises. The complaint alleged false declaration and lack of due diligence.
Key Allegations	– The respondent falsely certified physical verification of the registered office. – Claimed the premises belonged to the director’s mother but failed to prove ownership. – ROC inspection (after 5 years) found the office non-existent, alleging a false declaration in Form INC-32.
Respondent’s Defence	– Claimed he had personally visited and verified the premises, supported by photographs, affidavit from the owner (director’s mother), and witness confirmations. – The property was residential but genuine and suitable for registered office use. – Stated the company continued to exist at the same address as per MCA records. – Alleged misunderstanding in his earlier statement recorded by ROC.
Findings	– The company was incorporated in 2017 and the ROC inspection occurred five years later in 2022. – Evidence including society confirmation, owner’s affidavit, photographs, and witness letters corroborated the existence of the premises at the time of certification. – The company’s MCA records still showed the same address and active status. – The Committee held that the respondent had exercised reasonable due diligence as expected while certifying Form INC-32.
Decision	None – respondent exonerated. Not Guilty of Professional Misconduct under Item (7), Part I, Second Schedule of the CA Act, 1949.

3. Case: ROC, Kanpur vs. CA. M.G.

File No.: PR/G/113/2024/DD/187/2024/DC/1913/2024

Date of Order: 21.09.2025

Particulars	Details
Complainant	Registrar of Companies, Kanpur (MCA)
Nature of Case	Alleged lack of due diligence while certifying e-Form DIR-12 for appointment of a Chinese national as Director without mandatory security clearance
Background	The case arose out of a larger government investigation into incorporation and operation of companies linked to Chinese nationals. The respondent had certified Form DIR-12 for appointment of a Chinese national, as Director of M/s F on 6 September 2023. As per Rule 10(1) of the Companies (Appointment and Qualification of Directors) Amendment Rules, 2022, nationals of countries sharing land borders with India require security clearance from the Ministry of Home Affairs (MHA). The ROC alleged the respondent failed to ensure such clearance was obtained before certifying the form.
Key Allegations	– Certified Form DIR-12 without ensuring MHA security clearance for a Chinese national. – Relied on company’s written statement that no clearance was required as the director already had DIN and was residing in India with PAN and Aadhaar. – Failed to exercise due diligence under Item (7), Part I, Second Schedule of the CA Act, 1949.
Respondent’s Defence	– The director’s DIN was issued on 7 December 2021, before the 2022 amendment mandating security clearance; hence Rule 10(1) was inapplicable. – Sought clarification from the company via letter dated 1 September 2023; company replied on 5 September 2023 confirming exemption based on prior directorship and valid Indian documents. – Certified DIR-12 relying on company’s response; no false data was entered by him. – Argued that the obligation to obtain clearance rested with the appointee director and company, not the certifying CA.
Findings	– The Committee confirmed that Mr. D already possessed a DIN allotted in 2021, before Rule 10(1) came into force. – Rule 10(1) applies only to DIN applications (DIR-3), not subsequent appointments (DIR-12). – The respondent verified supporting documents — passport, PAN, Aadhaar, visa — and raised a written query on security clearance. – No amendment existed in Form DIR-2 to require attaching MHA clearance at that time. – Hence, the respondent had exercised reasonable diligence and no false certification was made.
Decision	Not Guilty of Professional Misconduct under Item (7), Part I, Second Schedule, Chartered Accountants Act, 1949.

ICAI And Its Members

I. REGULATORY UPDATE – ICAI ANNOUNCEMENT

a) Relaxation in compliance with the ‘Guidance Note on Financial Statements of Non-Corporate entities’ and ‘Guidance Note on Financial Statements of Limited Liability Partnerships’ for annual reporting period 2024-25

The ICAI has announced that compliance with the Guidance Note on Financial Statements of Non-Corporate Entities and the Guidance Note on Financial Statements of Limited Liability Partnerships, which were originally effective from April 1, 2024, has been relaxed for the annual reporting period 2024-25.

Application of these Guidance Notes during this period is voluntary. This relaxation does not affect the applicability of existing Accounting Standards or the Framework for Preparation and Presentation of Financial Statements, which remain mandatory.

b) Widening Scope of Mandatory Applicability of Audit Quality Maturity Model (AQMM) v.2.0 and Disclosure of Levels

CURRENT APPLICABILITY

AQMM is mandatory only for firms auditing:

Listed entities
Banks (other than Co-operative banks, except multi-state co-operative banks)
Insurance companies (excluding firms conducting only branch audits)

EXPANDED APPLICABILITY (PHASED MANNER)

From 1st April 2026
Firms auditing holding/subsidiary/associates/JVs of listed entities, banks (other than co-operative, except multi-state co-operative banks), and insurance companies (excluding branch audits).
Firms undertaking statutory audit of unlisted public companies with:
Paid-up capital ≥ ₹500 crores, or
Annual turnover ≥ ₹1000 crores, or
Outstanding loans, debentures & deposits ≥ ₹500 crores.
From 1st April 2027
Firms undertaking statutory audit of entities which have raised > ₹50 crores from public/banks/FIs during review period or any body corporate (including trusts) covered under public interest entities.

DISCLOSURE REQUIREMENTS

AQMM v.2.0 level of a firm to be:
Hosted level-wise on ICAI website by Peer Review Board.
Printed on Peer Review Certificates issued to firms.

II. Expert Advisory Committee (EAC) Opinion – September 2025

Recognition of Liability towards Planned Expenditure for Stage-II Forest Clearance and Environmental Management Plan under Ind AS

FACTS OF THE CASE

A Government of India PSU engaged in bauxite mining, alumina/aluminium production, captive power generation and wind power.
For a newly allotted bauxite mine the Company obtained:
Stage-I Forest Clearance (Jan 2023) – paid ₹262.12 crore for compensatory afforestation etc., booked as Intangible Assets under development.
Stage-II Forest Clearance (July 2023) – subject to revenue-type activities (soil erosion control, green belt etc.) estimated at ₹9.89 crore.
Environmental Clearance (June 2023) – requires an Environmental Management Plan (EMP) with planned capital works/equipment of ₹120 crore and annual maintenance ~₹12 crore.
Company view: No liability recognised for ₹9.89 crore or ₹120 crore as the obligating event arises only on execution of the mining lease / commencement of operations.
C&AG Audit view: Present obligations exist once clearances are granted and undertakings given; non-recognition understates liabilities and capital work-in-progress.

QUERY

(i) Whether the Company’s approach of recognising liability for Stage-II forest clearance expenditure only on execution of mining lease is correct under Ind AS.

(ii) Whether liability for EMP expenditure should be recognised only when equipment is procured/works executed, or at the date of Environmental Clearance.

POINTS CONSIDERED BY THE COMMITTEE

Ind AS 37 (Provisions, Contingent Liabilities and Contingent Assets):
Provision requires a present obligation from a past event, probable outflow, and reliable estimate.
No provision for costs required merely to operate in the future; obligation must exist independently of future actions.
Obtaining Stage-II and Environmental Clearances and giving undertakings do not themselves create a present obligation; they are commitments for future operations.
Present obligation arises only when the Company performs activities that cause the impact requiring mitigation e.g., entering forest land, commencing mining, causing pollution.
Timing of recognition demands management judgement based on specific conditions and commencement of the obligating activity.

EAC’S OPINION

No provision should be recognised at the stage of giving undertakings or merely receiving clearances.
Liability and corresponding asset arise only when a present obligation exists, i.e., when mining operations/activities trigger the need to incur the specified mitigation or pollution-control expenditure.
Until then, these are capital commitments requiring disclosure, not recognition as liabilities or assets.

ICAI Journal – The Chartered Accountant September 2025 pages 115-121

Link: https://resource.cdn.icai.org/87967cajournal-sep2025-32.pdf

III. ICAI Awards Nomination

a) ICAI Awards for Excellence in Financial Reporting 2024–25

The Institute of Chartered Accountants of India invites enterprises to participate in its prestigious Awards for Excellence in Financial Reporting.

HIGHLIGHTS

Objective: To recognise and encourage high-quality preparation and presentation of financial statements.
Awards: One Gold Shield and one Silver Shield in each category for the best annual reports.
Eligibility: Annual reports for financial year ending between 1 April 2024 and 31 March 2025.
Last Date: 15 October 2025.

AWARD CATEGORIES

Public & Private Sector Banks, Life & Non-life Insurance, Financial Services, Manufacturing & Trading (large and small turnover), Service Sector, Infrastructure & Construction, Not-for-Profit, Public Sector Enterprises, and Co-operatives.

PARTICIPATION

Submit entry form and documents online: https://bit.ly/efricao2025 and send hard copies to ICAI Research Committee.

b) ICAI–ZEE Business: CA Business Leader 40 Under 40 Awards

ICAI, in partnership with ZEE Business, invites nominations for the “CA Business Leader 40 Under 40 Award” to honour young Chartered Accountants driving innovation and growth in industry, entrepreneurship, and public service.

Why Apply

Gain national recognition, networking opportunities, and professional visibility while inspiring the next generation of CAs.

Categories

Manufacturing, Services, MSME, Start-up, BFSI, Women, Overseas, Others

Eligibility & Process

For ICAI members under 40. Entries validated by a process auditor and reviewed by an eminent jury.

Participation

Submit entry form and documents online by yourself or your employees:

♦ zeebiz.com/icai40under40

IV. ICAI BOARD OF DISCIPLINE CASES

1. Case: Dy. Registrar of Companies, WB vs. CA. P PR/G/354/2021/DD/64/2023/BOD/739/2024

Date of Order: 29.07.2025

Particulars	Details
Complainant	Dy. Registrar of Companies, West Bengal (MCA)
Nature of Case	Negligence in safeguarding Digital Signature Certificate (DSC) and failure to appear before investigating authorities
Background	Investigation into a shell company post-demonetisation scrutiny revealed that its tax audit reports for FY 2013-14 and 2014-15 were signed using the Respondent’s DSC. Summons were issued to the Respondent in 2018 but he failed to appear.
Key Allegations	– Failure to appear before ROC Inspectors despite valid summons. – Negligence in maintaining and safeguarding his DSC, enabling alleged misuse for filing tax audit reports without his knowledge. – Failure to update ICAI with his current address, obstructing investigation.
Respondent’s Defence	– Denied filing the tax audit reports and claimed he never received the 2018 summons. – Stated he had moved residence and inadvertently not updated ICAI records. – Alleged that a senior CA misused his DSC without consent when they shared office space.
Findings	– Admitted to sharing DSC and failing to secure it. – Provided no evidence of corrective action (no police complaint or revocation). – Negligence compromised integrity of digital filing system. – Defence of non-receipt of summons rejected; responsibility to safeguard DSC lies with holder.
Charges Established	Professional Misconduct under Clause (2), Part IV, First Schedule – “Other Misconduct”.
Punishment	Reprimand under Section 21A (3) of the Chartered Accountants Act, 1949.

2. Case: CA. S. vs. CA. R. PR/162/2023/DD/200/2023/BOD/753/2024

Date of Order: 29.07.2025

Particulars	Details
Complainant	CA. S
Nature of Case	Non-communication with previous auditor on acceptance of audit (breach of professional standard)
Background	The Complainant alleged that the Respondent, on being appointed as statutory auditor of a client, accepted the audit engagement without first communicating in writing with the previous auditor as mandated by the Code of Ethics and the Chartered Accountants Act, 1949.
Key Allegations	Violation of the requirement to obtain a no-objection/communicate with the outgoing auditor before accepting the audit assignment.
Respondent’s Defence	Appeared before the Board, acknowledged receipt of findings, and offered representation but did not disprove the allegation of non-communication.
Findings	The Board held that the Respondent failed to communicate with the previous auditor prior to acceptance, constituting Professional Misconduct under Item (8), Part I, First Schedule – failure to comply with provisions regarding acceptance of audit work.
Punishment	Monetary penalty of ₹25,000 under Section 21A(3) of the Chartered Accountants Act, 1949.

3. Case: Shri S. Roy Superintendent of Police & Head of Branch, CBI EOW vs. CA. G PR/G/121/19/DD/238/2019/BOD/613/2022

Date of Order: 29.07.2025

Particulars	Details
Complainant	Shri Sudip Roy, Superintendent of Police & Head of Branch, CBI EOW, Kolkata
Nature of Case	Other Misconduct – connivance in preparation of fake documents for car loan
Background	A CBI case was registered in 2016 based on Allahabad Bank’s complaint. It was found that a Honda City car originally owned by a borrower group (HVPL / Tarun Textiles – NPA accounts) was transferred without consideration to the then Chief Manager of Allahabad Bank, Shri R.K. Singh. To cover the irregularity, Shri Singh obtained a ₹4 lakh car loan in March 2012 from Allahabad Bank by showing purchase of the same car from a second-hand dealer “M/s First Drive.”
Key Allegations	– Respondent CA connived with Shri Anil Agarwal of M/s First Drive in preparing a fake bill/delivery challan of ₹4.70 lakh showing sale of the Honda City car to Shri R.K. Singh. – The said bill was used by Shri Singh to obtain a car loan of ₹4 lakh from Allahabad Bank.- Respondent further arranged routing of ₹4.70 lakh through Hena Vincom Pvt. Ltd. and handed over cash to Shri Singh, thereby facilitating adjustment of funds.
Respondent’s Defence	– Claimed the matter was over 10 years old, making it difficult to gather records. -Denied direct involvement; argued allegations were based on contradictory third-party statements. – Submitted that bills were forwarded only on request of the accused; the loan had already been applied on an earlier-dated bill. – Requested charges to be quashed.
Findings	– Respondent was aware of the parties and the transaction. – Evidence showed he emailed bills/documents to Anil Agarwal, admitted during hearing to “mistakenly” forwarding them. – Statements of Anil Agarwal and the Respondent himself established his role in arranging fake documentation and adjustment of ₹4.70 lakh. – Board held him guilty of “Other Misconduct” under Item (2), Part IV, First Schedule, CA Act, 1949 read with Section 22.
Punishment	Reprimand imposed by the Board of Discipline under Section 21A(3) of the CA Act, 1949.

Link: https://resource.cdn.icai.org/87317dtc-aps1808gn-tax-audit2025.pdf

ICAI and Its Members

I. ICAI TAX AUDIT NOTIFICATION

ICAI Notification under Section 15(2)(fa) of the Chartered Accountants Act, 1949 – Tax Audit Limit Guidelines, 2025

Notification: F. No. 1-CA(7)/234/2025 dated 25.07.2025

Effective Date: 1st April, 2026

Key Provisions

Title: Chartered Accountants (Limit on Number of Tax Audits) Guidelines, 2025.
Applicability: Effective from 1st April 2026.
Tax Audit Limit:

Individual Chartered Accountant / Proprietary firm: Maximum 60 tax audit assignments per financial year, whether corporate or non-corporate.
CA Firm: Maximum 60 tax audit assignments per partner per financial year.
Multiple Firm Membership: Where a partner is also a partner in any other CA firm(s), the aggregate ceiling of 60 audits applies across all firms.
Individual Capacity: Where a partner of a CA firm also accepts tax audits in his individual capacity, the aggregate ceiling of 60 audits applies across firm and individual capacity combined.
Branch/HO audits: Audit of head office and its branches to be counted as one assignment.
Revised audit reports: Not to be counted separately.
Assignments under Sections 44AE, 44ADA, and 44AD (clauses (c), (d), (e) of Sec 44AB): Not to be counted towards the limit.
Part-time partners: Not to be considered in calculating firm’s tax audit limit.

4. Record Maintenance: Every CA must maintain records of tax audit assignments accepted and signed in the prescribed format.

5. Supersession of Earlier Guidelines: These guidelines override earlier ones, including Chapter VI of Council General Guidelines, 2008, which remain valid only till 31st March, 2026

II. ICAI PUBLICATION

1. Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961 (Revised 2025)

Considering the recent revisions to Form No. 3CD and the amendments introduced by the Finance (No. 2) Act, 2024 and the Finance Act, 2025 to the Income-tax Act, 1961,the Direct Tax Committee of the Institute of Chartered Accountants of India has released the Revised (2025) Edition of the Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961. This updated edition is released keeping pace with ongoing legislative developments, judicial interpretations, and evolving professional practices. It serves as a comprehensive, practical resource designed to support members in fulfilling their tax audit responsibilities with accuracy, diligence, and confidence

2. Checklist for Preparation of ITR Forms (ITR-1 & ITR-4)

In pursuit of objective of to strengthen the knowledge base of members and offer practical insights into the evolving tax landscape and to support our members in guiding taxpayers through their return filing obligations, the Direct Taxes Committee has introduced a Checklist for Preparation of Income-tax Returns – ITR 1 to ITR 4. This checklist will be released as a series, aimed at equipping members with practical tools and insights to ensure accurate and timely compliance.

Link: https://resource.cdn.icai.org/87550dtc-aps1990.pdf

3. Frequently Asked Questions (FAQs) on Management Representation Letter

The publication contains FAQs on management representation letter and responses to these FAQs. For the benefit of the members, the publication also contains four Appendices which include illustrative templates on Representation Letter, Format for Updating Management Representation Letter, Format for Additional Considerations, and SA 580 Compliance Checklist. “Appendix I: Illustrative Representation Letter” includes a comprehensive format of management representation letter. The publication will enable auditors to comply with requirements of SA 580, “Written Representations” and to obtain the necessary management representations effectively.

Link: https://resource.cdn.icai.org/87555aasb-aps2002-publication.pdf

4. Technical Guide on Accounting for Expenditure on Corporate Social Responsibility Activities (Revised July 2025 Edition)

The revised edition of the Technical Guide on Accounting for Expenditure on Corporate Social Responsibility Activities has been brought out in view of the evolving regulatory landscape and emerging practical considerations in CSR accounting. It aims to provide continued clarity, relevance, and guidance to professionals in navigating the accounting and reporting aspects of CSR with confidence and consistency.

Link: https://resource.cdn.icai.org/87104clcgc-aps1579.pdf

III. EXPERT ADVISORY COMMITTEE OPINION

Treatment and Presentation of Perpetual Loan under Ind AS framework

Facts of the Case

A Government of India (GoI) undertaking under the Ministry of Defence, fully owned by GoI, engaged in construction/repair of ships and submarines.
In FY 2010–11, GoI sanctioned a financial restructuring package of ₹ 824.90 crores.

– ₹ 452.68 crores as grant-in-aid for clearing liabilities.

– ₹ 372.22 crores (loan + interest + guarantee fee) converted into a perpetual loan with zero interest.

Until FY 2023–24 (IGAAP), the Company classified the perpetual loan under Long-term Borrowings.
From FY 2024–25, the Company adopted Ind AS and sought guidance on its classification.

Query

What is the treatment of perpetual loans under Ind AS?
Can the perpetual loan be classified as Equity under Ind AS? If yes, what are the recognition, classification, and presentation requirements?

Points Considered by the Committee

The perpetual loan has no repayment or interest obligation and thus does not meet the definition of “financial liability” under Ind AS 32.
It also does not involve settlement through equity instruments; hence it represents a residual interest in the entity’s net assets.
As per Ind AS 32 and the Guidance Note on Division II – Ind AS Schedule III, instruments evidencing residual interest should be classified as “Instruments entirely equity in nature.”
Presentation requirements under Ind AS 1:

» Shown separately in Balance Sheet under Equity (after Equity Share Capital, before Other Equity).

» Separate reconciliation required in the Statement of Changes in Equity.

EAC’s Opinion

The perpetual loan of ₹372.22 crores should be considered as having the nature of Equity and classified as “Instruments entirely equity in nature.”
The Company should comply with the disclosure and presentation requirements of Ind AS 1 and Schedule III Guidance Note.

ICAI Journal August 2025 Pages 130-136

Link: https://resource.cdn.icai.org/87366cajournal-aug2025-36.pdf

IV. ICAI DISCIPLINARY COMMITTEE ORDERS

1. Case: Serious Fraud Investigation Office, Ministry of Corporate Affairs, Govt. of India vs. CA SS – PR/G/139/2020-DD/133/2020/DC/1827/2023

Date of Order: 4.08.2025

Particulars	Details
Complainant	Serious Fraud Investigation Office (SFIO), MCA
Background	SFIO investigation into M/s DSKDL revealed diversion of public deposits and bank borrowings via V S P Pvt. Ltd. and V P D PVT. Ltd. (V Group Co.) These entities were used as conduits to route > r 115 crore to Mrs. H under the guise of advances for material purchase.
Role of	Statutory Auditor of the DSKDL & V
Respondent	Group Co (FY 2011-12 to 2015-16).
Key Allegations	– Collusion with DSKDL KMPs in siphoning funds. – Failure to disclose related party transactions (AS 18). – Reporting advances as genuine despite sham transactions. – Gross negligence and lack of independent verification.
Findings	– V Group Cos were mere shells; no staff, no business, only fund transfers. – Respondent CA admitted before SFIO that no material was supplied and companies were conduits. – Failure to disclose material facts and misstatements materially affected true & fair view. – Respondent acted “hand in glove” with management.
Charges	Guilty of Professional Misconduct under:
Established	– Part I of Second Schedule: Clauses (5), (6), (7), (8). – Part IV of First Schedule: Clause (2).
Punishment	Removal of name from ICAI Register of Members for 2 months. – Fine of ₹ 50,000 (payable within 60 days).

2. Case: Income Tax Department vs. CA. A.M. – PR/173/16-DD/250/16/DC/764/2018

Date of Order: 24.07.2025

Particulars	Details
Complainant	Income Tax Department
Background	During search proceedings in the case of M/s. PACL Ltd., the Income Tax Department found that the Respondent had issued backdated audit reports and certificates to facilitate PACL’s false claims of compliance before SEBI.
Role of	Issued statutory certificates under
Respondent	Section 227 of the Companies Act, 1956 for PACL.
Key Allegations	– Issuance of false and misleading audit certificates, despite lack of supporting. – Helping PACL misrepresent its financial position to regulators. – Gross negligence and lack of professional independence.
Findings	– Certificates were knowingly issued without verifying underlying records. – Respondent’s conduct amounted to collusion with PACL’s management. – Serious breach of duty of independence and diligence.
Charges	Guilty of Professional Misconduct under:
Established	– Part I of Second Schedule: Clauses (5), (6), (7), (8). – Part IV of First Schedule: Clause (2).
Punishment	– Removal of name from ICAI Register of Members for 2 years. – Fine of ₹50,000 payable within 60 days.

3. Case: Income Tax Department vs. CA. S.G. – PR/35/2015-DD/48/2015/DC/993/2019

Date of Order: 5.08.2025

Particulars	Details
Complainant	Income Tax Department
Background	Search and seizure operations against B. R Group revealed that the Respondent, while acting as statutory auditor of group entities, failed to verify actual receipt of share application money and investments. Bogus share capital and premium entries were accepted without proper scrutiny.
Role of Respondent	Issued clean audit reports for companies which had routed unaccounted money as share capital / share premium.
Key Allegations	– Failure to independently verify share application money. – Acceptance of management’s explanation without corroboration. – Gross negligence in reporting true and fair view.
Findings	– Auditor did not perform necessary audit checks on large share capital and premium amounts. – Accepted sham transactions at face value. – Serious dereliction of duty and lack of skepticism.
Charges	Guilty of Professional Misconduct under:
Established	– Part I of Second Schedule: Clauses (5), (6), (7), (8). – Part IV of First Schedule: Clause (2).
Punishment	Removal of name from ICAI Register of Members for 1 year. Fine of r 50,000 payable within 60 days.

ICAI and Its Members

I OPINION

EAC Clarifies Accounting Treatment of Investment in Erstwhile Associate under Ind AS

The Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of India (ICAI) has issued an opinion addressing the accounting treatment of an investment in an erstwhile associate company under the Ind AS framework, following a query from a listed company transitioning to Ind AS.

Background:

The company had held shares in an associate (X Ltd.) since the 1970s. Due to financial distress, X Ltd. was referred to BIFR in 1998-99, and the investing company provided for 100% of its investment. Upon Ind AS transition in FY 2016-17, the investment was carried at a notional value of ₹1, using this as deemed cost under Ind AS 101.

In FY 2021-22, following a rights issue in which the investor did not participate, its holding dropped to 19%, and X Ltd. ceased to be an associate. Subsequently, in FY 2023-24, with the financial turnaround of X Ltd., the company proposed revaluation of the investment to fair value (~₹40–50 crore) through Other Comprehensive Income (OCI).

Key Question:

Can the company now measure its investment in X Ltd. at fair value through OCI (FVOCI)?

EAC’s Opinion:

As per Ind AS 109, an entity may opt to measure investments in equity instruments at FVOCI only at the time of initial recognition.
Since the company did not make an irrevocable FVOCI election when the associate ceased to be an associate in FY 2021-22 (initial recognition under Ind AS 109), it cannot do so retrospectively now.
Hence, the investment must be measured at fair value through Profit or Loss (FVTPL) in the current period.

Conclusion:

The Company must account for the investment in X Ltd. at FVTPL, not FVOCI, as the FVOCI option was not exercised at the appropriate time of reclassification under Ind AS 109.

ICAI Journal July 2025 Pages 150-152

Link:https://resource.cdn.icai.org/86757cajournal-july2025-41.pdf

II FAQS ON GUIDANCE NOTE FOR FINANCIAL STATEMENTS OF NON-CORPORATE ENTITIES

ICAI Issues FAQs on Guidance Note for Financial Statements of Non-Corporate Entities – Applicable from April 1, 2024

The Institute of Chartered Accountants of India (ICAI) has released a comprehensive set of FAQs relating to its Guidance Note on Financial Statements of Non-Corporate Entities, jointly issued by the Accounting Standards Board (ASB) and Auditing and Assurance Standards Board (AASB). This Guidance Note standardises the presentation of financial statements of non-corporate entities, aiming to improve quality, comparability, and reliability. It comes into effect from accounting periods beginning on or after April 1, 2024.

Key Highlights:

Scope of Applicability:

Applicable to all business/professional entities other than companies and LLPs, including:

♦ Proprietorships, HUFs, Partnership firms, AOPs, Societies, Trusts, Statutory bodies, and others engaged in business/profession.

Exclusions:

Not applicable where:

♦ Specific formats are prescribed by law or regulators,
♦ Entities like NPOs, political parties, or educational institutions follow ICAI’s other specific guidance.

Supersession of Technical Guide (2022):

The earlier Technical Guide on Financial Statements of Non-Corporate Entities (2022) stands superseded by this Guidance Note.

Prescribed Formats:

The Guidance Note mandates formats for financial statements. Additional line items may be added, and items with nil balances for both current and previous years may be omitted.

Comparative Figures:

Comparative financials for the immediately preceding year are required in the prescribed format (except for entities preparing financials for the first time).

Auditor’s Responsibility:

Non-compliance with the Guidance Note must be evaluated by the auditor for possible reporting or modification of opinion, in line with SA requirements. Professional judgment and documentation are essential.

Applicability to NPOs:

For Not-for-Profit Organisations, ICAI’s Technical Guide on Accounting for NPOs remains applicable.

Revised Classification & AS Applicability for Non-Company Entities (from April 1, 2024)

ICAI has also issued a revised classification framework for non-company entities regarding the applicability of Accounting Standards, effective April 1, 2024, replacing the 2020 scheme.

Classification:

MSMEs (Micro, Small & Medium-sized Entities):

Based on turnover ≤ ₹250 crore, borrowings ≤ ₹50 crore, not listed, not banks/FIs, and not subsidiaries/holding of large entities.

Large Entities:

Non-company entities not meeting MSME criteria.

Compliance Requirements:

Large Entities: Full compliance with all Accounting Standards.
MSMEs: Eligible for exemptions/relaxations in certain AS (e.g., AS 3, 17, 20, 24). Must disclose if exemptions are availed.

The revised scheme can also be accessed at the following link https://resource.cdn.icai.org/82761asb66837.pdf

III EXPERT PANEL

Expert Panel Support by AASB – Audit Season 2025

The Auditing and Assurance Standards Board (AASB) of the Institute of Chartered Accountants of India (ICAI) has reconstituted its Expert Panel to provide technical support to members during the upcoming Audit Season 2025, in continuation of the initiative undertaken over the past three years.

Panel Availability: 11th July 2025 to 30^th September 2025
Email for Queries: auditfaq@icai.in

Guidelines for Submission:

Be brief yet provide complete facts.
Do not mention the name of any client or entity.
Do not send the same query multiple times.
Refrain from follow-up rejoinders.
Exercise professional judgment while relying on responses.

The panel operates on a best-effort basis. Responses are personal views of experts and not the official views of ICAI/AASB. These should not be used as evidence in any judicial/quasi-judicial proceedings. AASB reserves the right to not respond to certain queries without assigning any reason.

Members are encouraged to make use of this support initiative during the audit season.

IV DISCIPLINARY CASE SUMMARY – ICAI DISCIPLINARY COMMITTEE

Case No.: DC/1726/2023

Complainant: Deputy Registrar of Companies, Mumbai

Order Date: 11^th February 2025

Outcome: Not Guilty of Professional and Other Misconduct

Background:

The complaint alleged that CA R, in his capacity as the statutory auditor and certifying professional, filed Form INC-22A (ACTIVE) for H Pvt. Ltd., showing a registered office address that, upon later inspection by the Registrar of Companies (RoC), was allegedly non-existent. The concern arose in the context of broader investigations into companies suspected of Chinese ownership using dummy directors, false documents, and allegedly involved in illegal activities such as money laundering and tax evasion.

Key Allegation:

Certifying a false registered office address in Form INC-22A filed in April 2019, despite the premises not being maintained by the company at the time of inspection in December 2021.

Respondent’s Defence:

The office address had been unchanged since incorporation in 2011.
Photographs and documents used to certify Form INC-22A were obtained from the company.
Physical verification by the RoC occurred 2.5 years after the form was certified.
The registered office was leased from a Chartered Accountant known to the Respondent, and the premises were visited earlier.
No rent was paid as the company had remained non-operational since inception.
There was no legal requirement for a CA to personally verify premises before certifying Form INC-22A.
The Respondent was not involved in the incorporation process or alleged illegal activities.

Committee’s Findings:

The certification was done based on documents and photographs as allowed under MCA norms.
Form INC-22A requirements were met, including attaching photographs and declaring satisfaction regarding the address.
The physical inspection occurred long after the certification, and no causal link to the Respondent’s conduct was established.
The Respondent was not named in any wrongdoing in the Registrar’s inquiry report.
The Economic Offences Wing confirmed that the Respondent was not involved in the criminal investigation and removed his name from the lookout notice.

Conclusion:

After considering the Respondent’s submissions, the delay in inspection, and absence of contrary evidence, the Disciplinary Committee held CA R of:

Other misconduct under Item (2), Part IV, First Schedule, and
Professional misconduct under Item (7), Part I, Second Schedule of the Chartered Accountants Act, 1949.

The case has been closed as per Rule 19(2) of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007.

2. Case No.: DC/191/2012

Complainant: Deputy Registrar of Companies, Mumbai

Order Date: 10^th February 2025

Outcome: Not Guilty of Professional and Other Misconduct

Background:

The Reserve Bank of India alleged that CA B, as statutory auditor for six investment companies during FY 2007–08, failed to report that these companies were carrying on business as Non-Banking Financial Institutions (NBFIs) without obtaining the required Certificate of Registration (CoR) under Section 45-IA of the RBI Act, 1934. The companies involved included M/s E Pvt. Ltd., F Investments Pvt Ltd, H Investments Pvt Ltd, S Investments Pvt Ltd, S Holdings Pvt Ltd, and V Investments Pvt Ltd.

The complaint alleged non-compliance with the Non-Banking Financial Companies Auditor’s Report (RBI) Directions, 2008, particularly Paragraphs 2 and 5 which required exception reporting to both the Board of Directors and RBI.

Respondent’s Defence:

The companies did not accept any public deposits and were engaged in investment activities, thus falling outside the CoR requirements under Section 45-IA.
Since no deposit-taking activity occurred, there was no need to file any exception reports.
The RBI did not initiate penal action against the companies or the auditor.
Exception reports were subsequently submitted post-CBI probe to avoid adverse regulatory action, though no violations were ultimately found.

Committee’s Findings:

No evidence was presented to prove that the companies engaged in activities requiring RBI registration.
No regulatory penalties or proceedings were initiated by RBI against the companies.
Financial records showed loans from directors and investments in shares, not public deposit mobilisation.
The Respondent had exercised professional judgement and fulfilled his audit duties under the applicable provisions.

Conclusion:

The Disciplinary Committee held that CA B was Not Guilty of Professional Misconduct under Clause (7), Part I, Second Schedule of the Chartered Accountants Act, 1949, which pertains to lack of due diligence or gross negligence.

Accordingly, the case was closed under Rule 19(2) of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007.

3. Case No.: DC/1910/2024

Order Date: 8^th February 2025

Outcome: Held Guilty of professional misconduct and monetary penalty of ₹25,000 levied

Background:

CA A served as the statutory auditor of a religious trust (Dawoodi Bohra Jamat, Dhrangadhra) for the financial years 2011–12 to 2016–17. The complaint alleged that the auditor failed to report a violation of Section 35 of the Gujarat Public Trust Act, 1950 concerning an investment of ₹23.23 lakh made by the trust into a private company, which was not in accordance with the statutory provisions for public trust funds.

Nature of Misconduct:

Failure to report non-compliance with Section 35 in the audit report despite repeated disclosure of the same amount (₹23.23 lakh) as “Other Deposits” over six consecutive financial years.
Lack of audit evidence: No supporting documentation for the deposit or asset purchase was obtained or verified.
Over-reliance on management representation despite the materiality (70% of the balance sheet size) and lack of corroborating documentation.
Failure to consider issuing a qualified or disclaimer opinion under SA 705, even when sufficient evidence was not available.

Committee’s Findings:

The auditor pleaded guilty during the hearing on 16th December 2024.
The funds were never applied for the intended asset purchase and were returned only in FY 2017–18.
The Assistant Charity Commissioner also concluded that the trust violated Section 35.
The Committee held that the Respondent failed to exercise due diligence and did not obtain sufficient appropriate audit evidence, violating:

•Item (7): Gross negligence in professional duties
•Item (8): Failure to obtain sufficient information to express a valid opinion

of Part I of the Second Schedule to the Chartered Accountants Act, 1949.

Outcome:

Held Guilty of professional misconduct.
A monetary penalty of ₹25,000 was imposed, payable within 60 days.

ICAI and Its Members

Editor’s Note:

We are pleased to restart this Feature w.e.f. July 2025, after a long break, to keep our readers abreast of the latest developments at the ICAI and important announcements of the ICAI for its members. In the past, this Feature was contributed by the past presidents of the BCAS, Late CA P. N. Shah and CA Harish Motiwala. We are happy to inform you that CA Paras Savla has agreed to contribute this Feature. We thank CA Paras Savla and wish you a happy reading.

I OPINION

Accounting treatment of salary paid to the Company Secretary of the Company having a single unit project under construction, under the Ind AS framework.

Summary

The EAC opinion evaluates the appropriate accounting treatment for salary payments made to the Company Secretary during the construction phase of a single-unit project, in accordance with Indian Accounting Standards (Ind AS). The focus is on determining whether such costs should be capitalised as part of the project cost or recognised as an expense in the period in which they are incurred.

Context and Facts of the Case

Nature of the Company:

The company is currently in the project development phase, with a single unit under construction, which has not yet commenced commercial operations.

Status of the Project:

The ongoing project qualifies as a “Qualifying Asset” under the provisions of Ind AS 16 (Property, Plant and Equipment) and potentially under Ind AS 23 (Borrowing Costs).

Role of the Company Secretary (CS):

The Company Secretary is employed on a full-time basis during the construction phase, primarily undertaking:

♦ Statutory and compliance-related duties (e.g., Board meetings, ROC filings, maintaining statutory registers).

♦ Project-related legal and governance tasks are necessary for operational readiness.

Cost Consideration:

The company incurs regular salary payments to the CS. However, there is no systematic time allocation maintained to segregate time spent between project-specific activities and routine corporate compliance functions.

Financial Reporting Framework:

The company prepares its financial statements under the Indian Accounting Standards (Ind AS) framework.

Technical Query:

Is the company’s practice of capitalising the salary paid to the Company Secretary, considering it has a single-unit project (where tariff is determined based on the approved project cost), in line with the requirements of Ind AS? If not, what is the correct accounting treatment?

Key Observations & Technical Analysis

1. Principles of Capitalisation – Ind AS 16

As per Para 16(b) of Ind AS 16, “directly attributable costs” necessary to bring an asset to the location and condition for it to be capable of operating as intended should be capitalised.
However, Para 19 specifically excludes general administrative and overhead costs from capitalisation unless they are directly attributable to the construction or acquisition of the asset.

2. Role of Company Secretary – Nature of Duties

The CS primarily undertakes:

♦ Statutory compliance

♦ Board governance

♦ Regulatory filings

These are entity-level governance functions and are not directly linked to the physical construction or technical development of the asset.

In the absence of a clear, auditable time allocation, it is impractical to distinguish any portion of the salary as being directly attributable to the project.

3. Tariff Linked to Project Cost – Not a Determinant

While the tariff determination may be based on the approved project cost (common in regulated sectors such as power, infrastructure, etc.), the accounting principles under Ind AS take precedence over regulatory pricing mechanisms.
Regulatory approvals of cost do not override the recognition and measurement criteria prescribed under Ind AS. Only costs that meet the test of “directly attributable” under Ind AS 16 are eligible for capitalisation.

Conclusion and EAC’s Viewpoint

The salary paid to the Company Secretary does not qualify for capitalisation under Ind AS 16, since the duties performed are not directly attributable to the construction or physical development of the asset. Accordingly, this expense should be charged to the Statement of Profit and Loss in the period in which it is incurred.

(Refer to Pages 1631-1635 of C.A. Journal-June, 2025)

II CPE HOURS OF MEMBERS – CONSEQUENCES OF NON-COMPLIANCE

The ICAI has notified that members who failed to complete their mandatory CPE hours for the calendar year 2024 are being granted a final opportunity to complete them by June 30, 2025.

This falls under Level I of the Consequential Provisions, which is part of the disciplinary/monitoring framework for non-compliance with Continuing Professional Education (CPE) requirements.

Who is Affected:

Members in Practice and Industry who have not completed the minimum CPE hours for 2024.

Implications of Non-Compliance of CPE for 2024:

Members who do not comply by June 30, 2025,
may face:
♦ Further consequences under Level II or III, or IV
♦ Ineligibility for certain ICAI positions or panels,
♦ Public disclosure of non-compliance in records.

Level II Consequences (1-07-2025 to 31-12-2025) – From 1^st July 2025, the non-compliance status for the year 2024 of the member would be displayed on the CPE Portal of the ICAI under his login till he has complied with the CPE requirement of twice the shortfall of CPE hours for that year.
Level III Consequences (1-01-2026 to 30-06-2026)- From 1^st January 2026, a Member holding Certificate of Practice (COP) is required to disclose the status of non-compliance of CPE hours requirement for the year 2024 in Multipurpose Empanelment Form (MEF) of ICAI (+) List of non-compliant members shall also be provided to Professional Development Committee (PDC) of the ICAI by CPE Committee of ICAI.
Level IV Consequences (1-07-2026 to 31-12-2026) – if the individual or the firm is otherwise eligible for the issuance of a Peer Review Certificate, only a Provisional Peer Review Certificate would be issued to such Individual, if he has not complied with the CPE requirement for the year 2024. Level – IV 1st July 2026 to 31st December 2026 Firm, if any partner has not complied with the CPE requirement for the year 2024.
Final consequences 1-01-2027 – If the member has not complied with CPE requirement for the year 2024 by 31^st December 2026, then the CPE Committee may refer the matter to the Disciplinary Directorate for action as deemed fit for the violation of these guidelines. (Refer to Page 1639 of C.A. Journal-June, 2025)

III EXPOSURE DRAFT ON PROPOSED GUIDELINES FOR OVERSEAS NETWORK FOR PUBLIC COMMENTS

ICAI Seeks Public Comments on Draft Guidelines for Overseas Networks

The Institute of Chartered Accountants of India (ICAI) has taken a significant step towards modernising the regulatory framework for Chartered Accountant firms through the establishment of the Committee for Aggregation of CA Firms (CACAF) in 2024-25. This specialised committee has been tasked with undertaking comprehensive studies, reviews, and revisions of various guidelines pertaining to CA firms, marking a crucial development in the profession’s regulatory landscape.

Background and Context

The formation of CACAF represents ICAI’s commitment to enhancing the operational framework for CA firms in an increasingly globalised business environment. As Indian businesses expand their international presence and foreign entities seek professional services from Indian CA firms, the need for clear, comprehensive guidelines governing overseas networks has become paramount.

The committee’s mandate encompasses a broad spectrum of activities aimed at strengthening the CA profession’s infrastructure, with particular emphasis on facilitating effective collaboration and maintaining professional standards across borders.

Key Development: Draft Guidelines for Overseas Networks

Following extensive deliberations and research, CACAF has developed draft Guidelines for Overseas Networks, which were presented to the ICAI Council during its 442nd meeting. Recognising the importance of stakeholder input in the regulatory process, the Council has approved the exposure of these guidelines for public consultation.

The draft guidelines address critical aspects of overseas network operations, including:

Regulatory compliance requirements for international collaborations
Professional standards and quality control measures
Risk management frameworks for cross-border operations
Ethical considerations in overseas network arrangements
Documentation and reporting requirements

Public Consultation Process

ICAI has initiated a comprehensive public consultation process to ensure that the final guidelines reflect the diverse perspectives and practical insights of the profession’s stakeholders. The institute has made the exposure draft readily accessible to all interested parties.

Document Access: The complete Exposure Draft is available for download at: https://resource.cdn.icai.org/86376ed-cacaf-dgon.pdf

Submission Deadline: Recognising the importance of thorough stakeholder engagement, ICAI has extended the deadline for submitting comments to July 16, 2025 (Wednesday).

Multiple Submission Channels

To ensure maximum accessibility and convenience, ICAI has established multiple channels for submitting comments:

1. Online Submission: The most convenient option is through the dedicated Google Form available at: https://forms.gle/aNbDXFYJJWZ11Q8K7

2. Email Submission: Comments can be sent directly to the committee’s dedicated email address: cacaf@icai.in

3. Postal Submission: For those preferring traditional correspondence, written comments can be mailed to:

Secretary, Committee for Aggregation of CA Firms

The Institute of Chartered Accountants of India

ICAI Bhawan, Post Box No. 7100

Indraprastha Marg, New Delhi 110 002

IV INVITATION FOR EMPANELMENT AS EXAMINERS FOR CHARTERED ACCOUNTANTS EXAMINATIONS

Who Can Apply

Chartered Accountants: Minimum 5 years in practice or service.
University Lecturers/Professors: Minimum 5 years of teaching experience.
Must not exceed 65 years of age.
Not eligible: those in CA coaching currently (5-year cooling-off period applicable), visually impaired, or previously rejected without serving the waiting period.

How to Apply

Online submission via ICAI’s examiners panel portal.
Print, sign & attach photo, then post with required documents to:

CA Anand Kumar Chaturvedi, Joint Secretary (Exams), ICAI Bhawan, New Delhi

Selection Process

Must pass a Computer-Based Qualifying Test:

♦ Part A: 25 MCQs in 30 minutes
♦ Part B: Evaluation of 5 sample answers in 2½ hours

Remuneration

Foundation Papers 1 & 2: ₹160 per answer book
Intermediate Papers: ₹200 each (for Paper 1,2,4,5)
Final Papers: ₹250 per answer book
(Refer to Page 1641 of C.A. Journal-June, 2025)

V DISCIPLINARY CASES OF THE BOARD OF DISCIPLINE

1) Board of Discipline Case No. BOD/692/2023 dated 10-Feb-2025

Background:

The complainant, owner of M/s M (later converted to a Section 8 company), accused CA of colluding with the Trust Secretary, leading to alleged misappropriation of over ₹18 crore.
Allegations included failure to comply with Income Tax and ROC filings, causing penalties and disqualification of directors; ₹1.3 crore transferred to CA XYZ from the Trust Secretary’s account on the day of an alleged ₹7 crore theft from the Trust, CA allegedly issued a cheque for ₹3.7 crore as a settlement for misappropriated funds.

Board’s Observations:

The complainant failed to provide credible evidence to prove theft or fraud.
₹1.3 crore received by the Respondent was explained as legitimate dues for professional services, supported by documents.
The cheque for ₹3.7 crore was neither encashed nor supported by evidence suggesting it was related to fraud; the Respondent claimed it was issued under coercion.
Several FIRs filed by the complainant against the CA were quashed or stayed by the High Court, citing them as baseless or filed under political pressure.
Investigations by the Enforcement Directorate (ED) and other authorities revealed that the claim of theft itself was false and misleading.

Conclusion:

The Board of Discipline (ICAI) held that CA is NOT GUILTY of other misconduct under Item (2) of Part IV of the First Schedule of the Chartered Accountants Act, 1949.

2) Case No.: BOD/655/2022 Date of Order: 10^th February 2025

Background:

This case arose from a complaint filed by A against CA, the former auditor of M/s B. The allegation centered around the Respondent’s refusal to issue a No Objection Certificate (NOC) to the incoming auditor, allegedly causing hardship to the company in appointing a new auditor. The complainant alleged that the Respondent acted with mala fide intent and deliberately delayed or denied the NOC, which was unethical and unprofessional.

Board’s Observations:

The Complainant lacked locus standi, as he was neither a director nor an authorised officer of the company. The authorisation provided was incomplete and not supported by proper board resolutions.
The dispute arose solely between two professionals (the Respondent and the incoming auditor) regarding procedural compliance for auditor change and pending audit fees.
The Respondent cited non-payment of his legitimate audit fees as the reason for withholding the NOC initially. The NOC was subsequently issued after payment.
The Board noted that the Complainant failed to appear before it, despite being served notice.

Conclusion:

The Board of Discipline held the Respondent ‘Not Guilty’ of ‘Other Misconduct’ under Item (2) of Part IV of the First Schedule of the Chartered Accountants Act, 1949.

3) Case No.: BOD/317/2017 | Date of Order: February 10 2025

Background:

This case was in connection with the widely publicised 2G Spectrum Case. The case was initiated based on CBI press releases, charge sheets, and media reports from 2011 alleging involvement in financial structuring and fund transfers aimed at circumventing Department of Telecommunications (DoT) regulations regarding license eligibility.

Key Allegations:

Colluding with other accused persons, to structure companies in a manner that misrepresented the ownership of S to secure telecom licenses.
Facilitating fund transfers of ₹95.51 crore and ₹3 crore to associated companies, allegedly to conceal the controlling interests.
Supplying false information to the DoT regarding shareholding patterns to misrepresent eligibility.

Board’s Observations:

The Board noted that the Special CBI Court (2G Spectrum Cases) had thoroughly adjudicated the matter and acquitted all accused, including the Respondent, citing a complete lack of evidence.
The Special Court highlighted that the charge sheet was based on misreading, selective reading, and out-of-context interpretation of official records.
The Court categorically stated that there was no evidence of criminality, no manipulation of policies, and no fraudulent intent proven.
The Board recognised that the funding structures through debt instruments (like preference shares and debentures) did not violate DoT guidelines, which only restricted equity cross-holdings beyond 10%.
The Board found that the Respondent acted within his professional role as an employee of the company, and no evidence substantiated any professional misconduct.

Conclusion:

The Board of Discipline held the Respondent ‘Not Guilty’ of ‘Other Misconduct’ under Item (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949, read with Section 22. Accordingly, the case was ordered to be closed under Rule 15(2) of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007

ICAI And Its Members

ICAI & Its Members

1. Disciplinary case :

In the case of U.V. Bendikar v. C.A. N. G. Kulkarni
the articled clerk of the member lodged a complaint against the member. In this
complaint, it was alleged that the member did not give his consent for transfer
of articleship as requested for by the complainant. It was also alleged that the
member had not paid stipend to the articled clerk and that the articled clerks
were asked to work for more than 35 hours in a week and that they were asked to
work on all public holidays and also on Sundays.

The Disciplinary Committee as also the Council of ICAI found
the member guilty of professional misconduct under clause (i) of Part II of the
second schedule of the C.A. Act. According to the Council, the member was guilty
of non-compliance with Regulations 32 B (Non-payment of monthly stipend) and 45
(Excess working hours). The Council recommended to the High Court to award
punishment of ‘Reprimand’ to the member.

The Bombay High Court has accepted the above recommendation
of the Council. According to the High Court, under Regulation 32B, a member is
required to pay stipend to the articled clerk on a month-to-month basis and the
member has no option to make payment in lump sum at any time. The High Court has
also accepted that the member’s office was open from 9.30 a.m. to 8.30 p.m. on
all 365 days and articled clerks were required to attend the office work even on
Sundays and public holidays. Thus, the articled clerks were asked to work for
more than 35 hours in a week.

(Refer Pages 1744-1746 of C.A. Journal-April, 2008)

2. Disclosure of Internal Consumption in the Profit & Loss Account :

The Expert Advisory Committee (EAC) has recently given an
opinion on the above issue (C.A. Journal April, 2008 P. 1686-1691) as under :

(i) The company owns and operates (i) gas pipeline of natural
gas, (ii) gas-based LPG manufacturing plants in different parts of the country,
(iii) an integrated gas-based petrochemical plant for producing polymers, and
(iv) LPG pipelines for transmission of LPG. The company has a number of
accounting units which record and maintain the accounts for the respective
business activities carried out by them.

(ii) There are inter-unit transfers of materials manufactured
in the respective units. Each unit records raw materials, fuel, etc. received
from the other unit and debits the price to ‘Raw Materials’ A/c. and/or ‘Power,
Fuel and Water Charge’ A/c. The unit transferring the material credits the
amount to ‘Other Income’ A/c. In the final consolidated Profit & Loss A/c. of
the company, these items appear on the debit side as expense and on the credit
side as other income.

(iii) The auditors objected to the above and observed that
disclosure of internal consumption in Profit & Loss account under the head
‘Income’ on the credit side and ‘consumption’ on the debit side was not proper.

(iv) The following two questions have been considered by EAC :

(a) Whether the disclosure of internal consumption of gas
separately from ‘Sales’ on the ‘Income’ side of the Profit & Loss account with
corresponding debit to ‘Raw Material Consumed’ and ‘Power, Fuel and Water
Charges’ on the ‘Expenses’ side of the Profit & Loss account by the company is
correct and in compliance with AS-9.

(b) In case the answer to (a) above is in the negative, an
appropriate method of accounting and disclosure to be followed by the company
for such internal consumption of gas, which will comply with the requirements
of AS-9, AS-17 and clause 2 of Part II of Schedule VI to the Companies Act,
1956, may kindly be suggested.

(v) EAC has given the following opinion :

(a) The disclosure of consumption of gas separately from
‘Sales’ on the ‘Income’ side of the Profit & Loss account with corresponding
debit to ‘Raw Material consumed’ and ‘Power’, Fuel and Water Charges’ on the
‘Expense’ side of the Profit & Loss account by the company is not correct even
though it is not shown as ‘revenue’ within the meaning of AS-9.

(b) The Committee is of the view that intersegment transfer
entries should be ignored while generating the financial statements of the
enterprise as a whole, even though these have to be considered for segment
reporting purpose under AS-17. This will ensure that there is no double
booking of the consumption and at the same time statistical information
required to be disclosed under Part II of Schedule VI to the Companies Act,
1956 would be available without including any profit element. For this
purpose, depending upon the basis of inter-segment pricing, some adjustments
may be needed, so that apart from quantitative information, financial value of
information disclosed is proper. In this regard, ‘Statement’ gives detailed
guidance. In other words, the Committee is of the view that merely for the
purposes of AS-17, it is not appropriate to bring various elements of
inter-segment transfers as a whole. Segment reporting can be done on the basis
of the information otherwise available with the company.

3. CPE credit requirement for Members :

In March, 2008 issue of BCA Journal (Page 710), it was
reported that members, unless exempted, may undergo unstructured programmes of
learning for specified period in each rolling three-year period. For members in
practice, this period is 30 CPE credit hours and for others it is 15 CPE credit
hours over a period of 3 years.

The following is the indicative list of unstructured CPE
activities :

Web-based learning modules

Self-learning modules and courses (use of audiotapes, videotapes, correspondence courses, computer-based learning programmes)

Reading and individual home study

Group or bilateral discussion on technical issues

Acting as visiting faculty or guest faculty at the various universities/management institutions/ institutions of national importance

Participation in CPE teleconferencing programmes without the supervision of the POD

Providing solutions to questionnaires/puzzles available on web/professional journals

Internal training programmes being organised by firms of Chartered Accountants with seven or more partners.

It is reported that a self-declaration given by a member about participation in such activities each year will be accepted by ICAI for giving CPE credit. It appears that in ‘Group or bilateral discussion on technical issues’ attendance in seminars, work-shops, study circle meetings, etc. organised by any professional association, society or other similar body will be recognised for unstructured programmes.

4. ICAI News:

(Note: Page Nos. given below are from CA. Journal for April, 2008)

i. Annual Membership Fees:

As reported earlier, the Annual Membership Fees payable by members to ICAI have been revised as under w.e.f. 1-4-2008.

(Pages 1629, 1779-1781)

ii. Quality Review Board:

The Central Government has constituted the Quality Review Board under Chapter VII (a) of the C.A. Act consisting of following members:

(a) Shri K. N. Memani – Chairman
(b) Shri A. K. Awasthi,
(c) Shri P. S. Sharma,
(d) Shri Dr. B. C. Jain,
(e)Shri Dushyant Tyagi,
(f)Shri R. Vasudevan,
(g)Shri Ved Jain,
(h)Shri Jayant Gokhale,
(i)Shri Manoj Fadnis,
(j) Shri K. P. Khandelwal,    and
(k) Shri G. Ramaswamy.
(Page 1789)

(iii) ICAI publications:

The following new publications are issued by ICAI :

a) Compendium of Opinions, Vol. XXV

b)Insurance Broking

C) Canadian Advantage (A Research Study on Canadian Business Opportunities).

ICAI And Its Members

ICAI & Its Members

1. Disciplinary cases :

In the case of Shri A. R. Chitlangi v. Shri P. L. Tapdiya,
the Articled Clerk (A.R. Chitlangi) had filed a complaint against the member
Shri P. L. Tapdiya alleging that the member did not pay stipend to him during
the period of his articles. The defence of the member was that the articled
clerk used to remain absent from his duties frequently without informing the
office, he was undisciplined and had irregular behaviour. The matter was
referred to the disciplinary committee. In the meantime, the member paid the
stipend due to the articled clerk and also issued Form 20, certifying the period
during which the articled clerk served his articles with him. In this Form there
was no mention about the irregularity or indiscipline of the articled clerk. The
only remark which the member had made was that the performance of articled clerk
was not satisfactory.

The Disciplinary Committee held the member guilty on the
ground that the member did not pay the stipend to the articled clerk and this
contravened Regulation 32 B of C.A. Regulations, 1964. The Council accepted this
finding and recommended to the High Court to award punishment of reprimand to
the member.

The Bombay High Court has not accepted the defence of the
member and held that in the facts of this case, the member was guilty of
contravention of Regulation 32 B for non-payment of stipend to the articled
clerk. The High Court has accepted the recommendation of the Council and
reprimanded the member.

(For details please refer P. 1890 of C.A. Journal for May,
2008).

2. Working hours of Articled Assistants :

Some doubts were raised about the working hours of Articled
Assistants. The Council believes that article training is an important part of
the C.A. curriculum and the same needs to be carried out in accordance with the
scheme framed by ICAI. Therefore, the following clarifications are issued by
ICAI :

(i) The working hours for the articled assistants shall be
35 hours in a week excluding the lunch break.

(ii) The office hours of the Principal for providing
article training to the articled assistants shall not be generally before 9.00
a.m. or after 7.00 p.m.

(iii) The normal working hours for the articled assistants
shall not start after 11.00 a.m. or end before 5.00 p.m.

(iv) The working hours for the articled assistants should
not exceed 35 hours in a week excluding the lunch break and normally an
articled assistant should be required to work during the normal working hours
fixed for articled assistants.

(v) In case of the exigencies of work with the Principal,
an articled assistant may be required to work beyond his/her normal working
hours. However, under such circumstances, the aggregate number of working
hours shall not exceed 45 hours per week. The requirement to work beyond 35
hours in a week should not be a practice, but be applicable only in
exceptional circumstances. Further, where the articled assistant is required
to work beyond normal working hours, and aggregate of such hours exceeds 35
hours per week, he/she shall be entitled to compensatory leave calculated with
reference to number of completed working hours, over and above, 35 hours per
week.

(vi) The facility of allowing flexible office hours stands
withdrawn.

(vii) To ensure that the working hours do not clash with
the graduation or any other course, if any pursued by the article assistant,
each articled assistant registered on or after 1st April 2008 shall now be
required to obtain specific permission from the ICAI for pursuing graduation
or other course as permitted under the Chartered Accountants Regulation by
submitting Form No.112, within one month from the date of joining the college
or course to the ICAI.

(viii) The articled assistant presently registered and
undergoing graduation or any other course and who has not obtained specific
permission shall be required to obtain the specific permission from the ICAI
by submitting Form No. 112 within six months of issue of these guidelines
i.e., by 30th September 2008.

(ix) The Certificate in Form No.112 indicating college
timings, etc. shall be countersigned by the concerned Principal of the college
with the seal and stamp of the College and also indicating the telephone
number/s and full address of the College.

(x) In case a student does not comply with the above
requirements or violates any of the above guidelines, his/her articleship
period shall not be recognised.

(For details
refer to p. 1940 – 1941 of C.A. Journal for May, 2008)

3. Accounting technicians :

ICAI on 3rd April, 2008, announced to launch a course for
Accounting Technicians from 22nd April for undergraduate students. This is a new
course which ICAI wants to introduce in our country. Brief details about the
need for Accounting Technicians in our country are stated in the President’s
Message at Page 1806 of C.A. Journal for May, 2008 as under :

“The multi-faceted growth of Indian economy has resulted in huge demand for second-tier accounting personnel for large as well as small and medium enterprises. For long, a need was being felt for persons with accounting and related skills commensurate with the requirements at the operational level. Responding to this ever-increasing demand in industry as well as in the services sector, the Council has decided to launch ‘Accounting Technicians Course’. These accounting technicians will not only fill gaps at the operational level as accountants but will also ensure that the value chain in the accounting process does not suffer. With closer integration of agriculture and informal sectors with the mainstream economy, the demand for such professionals is expected to go up every year. I believe that this step will provide a much needed service and further boost our image as a premier accounting Institute in the country. As per the proposal, a step-up approach is being adopted whereby a student having qualified the Accounting Technicians Course will be eligible to enrol for the CA Course. At the same time, a student who has enrolled for a CA course but who for one reason or the other is not able to complete the CA Course will have the option to become an accounting technician. Further, all those students who have passed Intermediate or FE-II Examination of the Institute at any time in the past and have completed articled training shall also be eligible for Accounting Technician Certificate.”

4. ICAI News:
(Note: Page Nos. given below are from CA. Journal for May, 2008)

i) Auditing Standard:

Exposure draft on Revised Standard on Auditing (SA) 260 on ‘Communication with those charged with Governance’ is published for comments by members by 15-6-2008. Similarly, Explanatory Memorandum to this Exposure draft is also published (Pages 1959-1975).

ii) Clause 49 of Listing Agreement:

SEBI has issued a Circular on 8-4-2008 making some modifications in clause 49 of the Listing Agreements. This Circular clarifies that 50% of the Directors on the Board of Directors of a listed company should be independent directors if the non-executive chairman of the Board is a promotor or related to the promotors or persons occupying management positions. At present, if the chairman is a non executive director, the requirement is that only 1/3rd of the Board should consist of independent directors. SEBI has also stated that the minimum age of an independent director should be 21 years (Page 1952).

iii) Perspective Planning Committee:

ICAI has appointed the above committee which will identify the areas of concern by flagging issues which affect the profession. The committee hag invited the views of the members. (Page 1948).

iv) New Branches of ICAI :

Following new Branches have been established w.e.f 27-3-2008 :

a) Amravati Branch of WIRC
b) Pimpri Chinchwad Brach of WIRC (Refer page 1946)

v) Delivery of Journal at Residential Address:

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).

ICAI And Its Members

ICAI & Its Members

1. Disciplinary
case :

ICAI v.
Shri B. R. Kurhade (C.A. Journal, June 2008, Page 2016)

In the above case, the Jt. Director of Industries, Mumbai,
filed a complaint against the member alleging that the member had certified
information of past consumption, production, etc. in respect of import
applications made by 12 SSI units located in Ahmednagar district. It was found,
on subsequent investigation, that these certificates given by the member were
wrong. It was also found that some of the SSI units were not working regularly
or had not maintained required consumption, etc. records or did not require or
could not use the raw material applied for in their manufacturing process.

The Council found the member guilty of professional
misconduct under clauses (7) and (8) of Part I of the Second Schedule of the
C.A. Act and recommended to the High Court to remove the name of the member for
2 years. The Bombay High Court accepted this finding, but reduced the punishment
for removal of name of the member to 3 months.

2. Capitalisation of exchange loss :

The Expert Advisory Committee (EAC) of ICAI has considered
the above issue on pages 2002–2004 of C.A. Journal of June, 2008.

(i) The facts in this case are as under :

The company entered into an agreement for foreign currency
loan in respect of its expansion projects. As on 31-3-2007, there was a
reduction in exchange rate of Euro. As a result of this the liability for the
foreign loan is reduced. The question for consideration was as to whether the
exchange rate variations on the foreign exchange currency loan taken for the
expansion project, during the period of construction, should be capitalised or
abated.

(ii) EAC has given the following opinion :

The foreign exchange loss on foreign currency loan can be
capitalised only to the extent mentioned in para 4(e) of AS-16 (Borrowing
Costs). Any excess exchange loss should be treated as revenue loss. The exchange
gain with respect to the qualifying asset under AS-16 can be adjusted against
the cost of the asset only to the extent mentioned in para 4(e) of AS-16. The
exchange gain in excess of this amount should be credited to Profit & Loss A/c.

3. Advertisement by practising CAs :

The Council of ICAI has framed guidelines allowing practising
CAs and their firms to advertise their services through a write-up issued,
circulated or published through print or electronic media. These guidelines have
been hosted on the website of the Institute. Brief outline of these guidelines
is as under.

(1) The member(s)/firm(s) should ensure that the contents of
the write-up are true to the best of their knowledge and belief and are in
conformity with these guidelines and be aware that the ICAI does not own any
responsibility whatsoever for such contents or claims by the writer member(s)/firm(s).

(2) The word ‘write-up’ is defined to mean the writing of
particulars according to the information given in the guidelines setting out
services rendered by the members or firms and any writing or display of the
particulars of the member(s) in practice or of firm(s) issued, circulated or
published by way of print or electronic media or otherwise including in
newspapers, journals, magazines and websites (in Push as well in Pull mode) in
accordance with the guidelines.

(3) The write-up may include only the following information :

(A)
For members

(i) Name . . . . . . . . . . . . . . .Chartered
Accountant,

(ii) Membership No. with Institute,

(iii) Age,

(iv) Date of becoming ACA,

(v) Date of becoming FCA,

(vi) Date from which COP held,

(vii) Recognised qualifications,

(viii) Languages known,

(ix) Telephone/Mobile/Fax No.,

(x) Professional address,

(xi) Web,

(xii) E-Mail,

(xiii) CA logo,

(xiv) Passport size photograph,

(xv) Details of employees (Nos. —)

(a) Chartered Accountants,

(b) Other professionals,

(d) Other employees —

(xvi) Names of the employees and their particulars on the
lines allowed for a member as stated above, and

(xvii) Services provided —

(a) ,

(b) ,

(B)
For firms

(i) Name of the firm . . . . chartered accountants,

(ii) Firm Registration No. with Institute,

(iii) Year of establishment,

(iv) Professional address(s),

(v) Working hours,

(vi) Tel. No.(s)/Mobile No./Fax No(s),

(vii) Web address,

(viii) E-Mail,

(ix) No. of partners,

(x) Name of the proprietor/partners and their particulars on the lines allowed for a member as stated above including passport-size photograph,

(xi) CA logo,

(xii) Details of employees (Nos. —)

(a) Chartered Accountants,
(b) Other professionals,
(c) Articles/Audit assistants,
(d) Other employees
(xiii) Names of the employees of the firm and their particulars on the lines allowed for a member as stated above, and

(xiv) Services provided:
(a)
(b)
(c)………… [Note: Item (ii) is mandatory]

(4) Other conditions relating to the write-up:
(i) It should not be false or misleading and bring the profession into disrepute.
(ii) It should not claim superiority over other member(s)/firm(s).
(iii) It should not be indecent, sensational or otherwise of such nature which may likely to bring the profession into disrepute.
(iv) It should not contain testimonials or endorsements concerning member(s).
(v) It should not contain any other representation(s) that may likely to cause a person to misunderstand and/or to be deceived.
(vi) It should not violate the provisions of the CA Act and Rules made thereunder and CA Regulations.
(vii) It should not include the names of the clients (both past and present).
(viii) It should not be of font size exceeding 14.
(ix) It should not contain any information other than stated in Para (3) hereinabove.
(x) It should not contain any information about achievements/ award or any other position held. A.

4. Prospects for members in industry :
ICAI had organised Campus Placement Programme for members during February-April, 2008 at 16 centres in India. Out of members who qualified in November, 2007 examination, 3781 candidates (preceding programme: 1823 candidates) participated in this programme. 243 Interview Boards representing 109 organisations interviewed the candidates at 16 centres. More than 1250 candidates were selected for jobs in various industries. Maximum salary offered to 4 candidates was Rs.16.17 lacs P.A. for international posting. For Indian posting maximum salary offered to 5 candidates was Rs.12 lacs P.A. The following are the figures for salary range. (Refer pages 2084-2086 of C.A. Journal for June, 2008).

5. Amendment to CA. Regulations 1988 :
Notification dated 5-5-2008 giving draft of the amendments to C.A. Regulations has been published on pages 2069-2073 of CA. Journal, June, 2008. Broadly stated the draft regulations provide for the following:
(i) Amount payable for obtaining copies of list of members.

(ii) Revision in fees payable for restoration of membership, restoration of COP, filing complaints against members, etc.

(iii) Permitting members to enter into partnership or arrangement for sharing fees with members of (a) Institute of Company Secretaries of India, (b) Institute of Cost and Works Accountants of India, (c) Bar Council of India, (d) Indian Institute of Architects, (e) Institute of Actuaries of India, and (f) Engineer, Technician, MBA, etc. from recognised universities.

(iv) Functions of Executive Committee of ICAL

(v) Functions of Finance Committee of ICAL

6. ICAI News:
(Note: Page Nos. given below are from CA. Journal for June, 2008)

(i) Unstructured CPE Learning Activities:
In May, 2008, issue of BCA Journal (Page 224) details about CPE credit requirement for ICAI members are given. The indicative list of unstructured CPE activities is also given. Now, details of unstructured CPE Learning Activities have been published on pages 2005-2006 of C.A. Journal of June, 2008.

(ii) Observations during conduct of Peer Review:
Observations of reviewers during conduct of Peer Review on Compliance with AAS-6, AAS-7, AAS-8, AAS-ll and AAS-14 to improve audit quality have been published (Page 2058).

(iii) Audit and Assurance Standard Board (AAS Board) Recent developments relating to AAS are explained by ICAI at pages 2060-2065.

(iv) ICAI Publications:
The following publications are released by ICAI :
(a) What is an Audit – Understanding an Audit of Financial Statements.
(b) Practitioners’ Guide to Audit of Small Industries.
(c) Background Material on Auditing and Assurance Standards
(d) Implementation Guide to SQC-1
(For details refer to page 2066 and 2076)

(v) ICAI Vision – 2021 :
ICAI has appointed a Special Purpose Committee for bringing out a vision – 2021 document. The questionnaires for members in practice and in industry are published on pages 2094-2017. Members may send their responses to ICAL

(vi) Accounting Standards for Local Bodies (ASLB) :
The following exposure drafts are issued for comments by members:
(a) Revenue from Exchange Transactions (Pages 2108-2120)
(b) Borrowing Costs (Pages 2121-2127)

(vii) Auditing Standards (Revised Standard (SA) 600) :
Exposure draft of Revised Standard on Special Considerations – Audits of Group Financial Statements (including the work of component auditors) and Explanatory Memorandum to the above standard has been issued by AASB (pages 2128-2155).

(viii) Revival of Membership of CA :
With a view to encourage those CAs who have ceased to be members of the Institute for some reason or the other, a new scheme has been formulated by ICAL They will be able to revive their membership on payment of specified fees. This scheme is hosted on the Institute’s website (Page 1986).

(ix) PE-II Examination to continue till May, 2009 :
ICAI has decided to continue PE-II examination till May, 2009. Therefore, students who have not been able to pass in May, 2008 PE-II examination will get two more attempts in November, 2008 and May, 2009. Thereafter, they will have to shift to new PCC examination (Page 1987).

(x) New Chapter in New York:
ICAI has set up a new Chapter in New York. This is the 20th Chapter of the Institute outside India (Page 1989)

ICAI And Its Members

ICAI & Its Members

I. CPE programme exemption to senior citizens withdrawn :

1. ICAI has introduced the Continuing Professional Education
(CPE) Scheme under which members are required to attend certain CPE programmes
for specified number of hours. Under this Scheme, exemption was given to members
who have attained the age of 60 years. It is surprising that when our Institute
is entering the 60th year and we are celebrating the Diamond Jubilee year, this
exemption has been withdrawn with effect from 15th May, 2008. One may ask
whether this is a gift to our members who are senior citizens. Notification to
this effect has been published in C.A. Journal for July, 2008 on page 200.

2. CPE learning programms are divided into two parts viz.
structured and unstructured learning as under :

(i) Structured Learning :

(a) Attendance at conferences, seminars and symposia
organised by ICAI, its branches, regional councils, study circles and other
institutions or organisations approved by CPE Committee of ICAI.

(b) Presentation of papers, delivering lectures, acting as
faculty at such conferences, seminars, etc.

(d) Undertaking technical research under the aegis of ICAI.

(e) Such other activities as may be prescribed by CPE
Committee of ICAI.

(ii) Unstructured learning :

(a) Web-based learning modules.

(b) Self-learning modules and courses (use of audio-tapes,
video-tapes, correspondence courses, computer-based learning programmes).

(c) Reading and individual home study (Reading and
individual home study may constitute reading articles in the C.A. Journal,
reading technical, professional, financial or business literature).

(d) Group or bilateral discussion on technical issues.

(e) Acting as visiting faculty or guest faculty at various
universities, management institutions or institutions of national importance.

(f) Participation in CPE teleconferencing programmes
without the supervision of the Programme Organising Unit (POU).

(g) Providing solutions to questionnaires, puzzles
available on web or professional journals.

(h) Internal training programme being organised by firms of
Chartered Accountants having seven or more partners.

Details of the above learning programmes can be obtained from
pronouncements on Continuing Professional Education Publication of ICAI as well
as from CPE portal (www.cpeicai.org) and ICAI website (www.icai.org).

3. Members residing in India, who are below 60 years of age
and who hold Certificate of Practice, (unless they are exempted) are required
to :

(i) Complete at least 90 CPE Credit hours in each rolling
3-year period (2008-2010). Out of this 60 CPE credit hours should be of
structured learning.

(ii) For the above purpose such member will have to
complete minimum of 20 CPE Credit hours of structured learning in each year.

From the above it will be noticed that structured learning is
mandatory for such member for 60 CPE Credit hours. He will have the option to
devote balance 30 CPE Credit hours in unstructured learning.

4. Members residing in India, who are below 60 years of age
and who do not hold Certificate of Practice as well as all members residing
abroad (whether holding Certificate of Practice or not), unless exempted, are
required to

(i) Complete at least 45 CPE Credit hours of structured or
unstructured learning in each rolling 3-year period (2008-2010).

(ii) For the above purpose, such member will have to
complete minimum of 10 CPE Credit hours of structured or unstructured learning
in each year.

From the above it will be noted that structured learning is
not mandatory for such members. They can take up unstructured learning for the
entire period of 45 CPE Credit hours.

5. As stated earlier, members who have attained 60 years of
age (Senior citizens) were exempt from complying with this requirement. However,
the Council of ICAI has now withdrawn this exemption w.e.f. 15-5-2008. Since 4½
months have passed in the current year, the total period of CPE Credit hours
required to be completed in the rolling period of 3 years (2008-2010) has been
reduced to (i) 70 in the case of such members residing in India and holding
Certificate of Practice and to (ii) 35 in cases of members residing abroad
(whether holding certificate of practice or not) and other members residing in
India and not holding certificate of practice. It may be noted that all such
Senior Citizens will have an option to undertake structured or unstructured
learning. In other words, structured learning is not mandatory for them and they
can select unstructured learning for the entire period of CPE Credit hours.

6. Notification published on page 200 of CA Journal for July
2008 states that Senior Citizen Members (unless exempted) have to complete CPE
Credit hours of structured or unstructured learning as under :

(i) Senior citizen members residing in India and holding
Certificate of Practice — 70 CPE Credit hours in the rolling 3-year period
(2008-2010). Out of this minimum of 10 CPE hours should be in 2008 and minimum
of 20 CPE hours should be in 2009 and 2010 each, respectively.

(ii) Senior citizen members residing in India and not
holding Certificate of Practice and those residing abroad (whether holding
certificate of practice or not) — 35 CPE Credit hours in the rolling 3-year
period (2008-2010). Out of this, minimum of 5 CPE Credit hours should be in
2008 and minimum of 10 CPE Credit hours should be in 2009 and 2010 each,
respectively.

7. It may be noted that under the CPE Scheme, exemption from
the above requirements is available to the following members :

(i) A member, for the year during which he gets his membership for the first time.

(ii) A member or class of members to whom the CPE Committee or its sub-committee may, in their absolute discretion, grant full/partial exemption either specific/general, on account of facts and circumstances of the case which in their opinion prevent such member from compliance with the requirements of completing CPE credit hours

8. CPE Scheme provides for detailed procedure for keeping records by the Institute about attendance of members who attend structured learning programmes of the Institute and other eligible entities. This enables ICAI to issue certificates for CPE Credit hours completed by the members in every calendar year.

9. As regards unstructured learning, the member who wants to take CPE Credit hours, the requirement is that he should submit a self-declaration Form to the Institute every year. This Form is to submitted to the decentrallsed / sub-decentralised offices of the Institute every year before 31st May. The format of this Form is given on the next page.

10. Considering the above requirements of unstructured learning for members who are senior citizens, it appears that the most convenient mode of learning will be as under:

i) Reading and individual home study i.e., reading articles in the CA. Journal, reading technical, professional, financial or business literature.

ii) Group or bilateral discussion on technical issues –

This will include attendance in group discussions at workshops, study groups, seminars, symposia, conferences, etc. organised by any voluntary body such as a society, association, chamber, group, etc. on technical issues relating to the accounting profession.

iii) Participation at internal training programme organised by firms of Chartered Accountants having seven or more partners.

11. With the above coverage of all senior citizens under the CPE Scheme, it has become mandatory for all members of the Institute (over 1.46 lacs members) to comply with the CPE Scheme. The Institute will have to create a machinery to scrutinise over 1.46 lacs self-declaration forms received from members every year and determine whether all members have complied with the requirements of CPE. In this exercise, the records maintained by the Institute for attendance of members in structured learning programmes will also be required to be considered. ICAI will have to issue comprehensive guidelines about the punishment to be awarded to defaulting members who are holding certificate of practice and those who are not holding certificate of practice.

II. ICAI News

(Note: Page Nos. given below are from c.A. Journal for July, 2008)

1. General amnesty for restoration of names of members and C.P.:

ICAI has introduced an amnesty scheme for restoration of names of members with retrospective effect on payment of certain fees and filing Form No.9. The member can also apply for certificate of practice in Form No.6 prospectively on payment of fees. This scheme will be in force up to 31-12-2008. Details of the scheme are on page 198.

2. Data of members on Board of directors of companies:

ICAI is compiling data about members who are presently working as executive/non-executive/in-dependent directors of public companies (whether listed or not) so that they can share their experience with other aspiring Board members. Such details have to be furnished in the format given on page 201.

3. Chapter at Muscat:

ICAI has decided to set up a chapter in Muscat. Details are given on page 201.

4. Campus placement programme:

As in the past, ICAI has organised campus placement programme for candidates who qualify in May, 2008, Final examination. The schedule is as under;

(i) 2-9-2008 to 5-9-2008 :
Ahmedabad, Baroda, Chandigarh, Coimbatore, Ernakulam, Hyderabad, Indore, Jaipur, Kanpur, Nagpur, Nashik, Pune and Surat.

ii) 17-9-2008 to 25-9-2008 (excluding Sunday) :
Bangalore, Chennai, Kolkata, Mumbai and New Delhi (Details on page 203).

5. Guidance Notes:
The following Guidance Notes issued by Research Committee have been withdrawn by ICAI.

i) Mode of Valuation of Fixed Assets (Revised in 1976)

ii) Guidance Note on Accounting for Changing Prices (Issued in 1982) ./ (Refer page 204)

6. Advertisement by practising CAs:

In July issue of BCA Journal (P. S09) details about this issue are given. ICAI Notification in this respect is published on pages 206 and 208.

7. Approval of Accounting Standard (AS-32) :

The Council of ICAI has approved Accounting Standard (AS) 32, ‘Financial Instruments; Disclosures’. The objective of this Accounting Standard is to require entities to provide disclosures in their financial statements to enable users to evaluate the following;

i) the significance of financial instruments for the entity’s financial position and performance; and

ii) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the end of the reporting period, and how the entity manages those risks.

In view of the above, the Accounting Standard will bring about greater transparency in the disclosures related to financial instruments, such as derivatives and the exposures to the risks related to such financial instruments, and how the entity manages its risks.

It may be noted that ICAI has already issued the related Accounting Standards, namely, Accounting Standard (AS) 30, ‘Financial Instruments; Recognition and Measurement’ and Accounting Standard (AS) 31, ‘Financial Instruments: Presentation’. Issuance of this standard completes Accounting Stardards on the subject of Financial Instruments. Like AS-30 and AS-31, the Council has made AS-32 recommendatory from 1st April 2009 and mandatory from 1st April 2011.

ICAI And Its Members

1. Disciplinary case :

Case of ICAI v. Shri Deepak Parti and Anr. is reported on page 1424 of C.A. Journal for March, 2010. In this case, the complainant alleged that the member, in his capacity as Vice-Chairman, promoted an NBFC (M/s. Schematic Finance Ltd.). The complainant and her son were regularly investing funds in this NBFC. The NBFC used to give post-dated cheques for redemption money and interest. One of the deposits for Rs.6.70 lacs was made and NBFC gave post-dated cheque for this amount and interest due. This cheque when deposited in the bank, was returned unpaid. On inquiry, the complainant found that the NBFC company had closed its office. The matter was referred to the Company Law Board. The CLB fixed dates for repayment in instalments, but the CLB order was not complied with.

When the matter was referred to the disciplinary committee, it held that the member was guilty of ‘other misconduct’. The Council accepted this finding and referred the matter to the High Court with a recommendation that the name of the member be removed from the Register of Members for a period of six months.

The member did not appear before the Delhi High Court. On consideration of the report of the disciplinary committee and the finding of the Council, the High Court held that the name of the member be removed from the Register of Members for a period of six months.

2. Some ethical issues :

The Ethical Standards Board has considered some ethical issues and given its views on page 1406 of CA Journal for March, 2010. Some of the issues as decided by ESB are as under :

(i) Whether communication with previous auditor is necessary in case of appointment as statutory auditor by nationalised and other banks ?

Ans. : Clause (8) of Part I of the First Schedule to the CA Act is equally applicable in case of nationalised and other banks and also to Government agencies and, therefore, such communication is necessary.

(ii) Whether communication by the incoming auditor is mandatory with the previous auditor in respect of various audit assignments, like the concurrent audit, revenue audit, tax audit and special audits, etc. ?

Ans. : The requirement for communicating with the previous auditor would apply to all types of audits viz., statutory audit, tax audit, internal audit, concurrent audit or any other kind of audit. The Council has laid down detailed guidelines in this regard and the same are appearing at pages 166–168 of the Code of Ethics, 2009.

(iii) Whether a Chartered Accountant will be deemed to be guilty of professional misconduct if he accepts his appointment as an auditor immediately after intimating his appointment over the phone to the previous auditor ?

Ans. : The member would be held guilty of professional misconduct for the following reasons :

(a) That he had failed to communicate with the retiring auditor in writing; and

(b) That he did not wait for a reasonable length of time for a reply to be received from him.

(iv) Whether a Chartered Accountant can accept an appointment as auditor of a company without first ascertaining from it whether the requirements of S. 225 of the Companies Act, 1956 in respect of such appointment have been duly complied with ?

Ans. : As per clause (9) of Part I of the First Schedule to the CA Act, a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he accepts an appointment as auditor of a company without first ascertaining from it whether the requirements of S. 225 of the Companies Act, 1956 in respect of such appointment have been duly complied with. In this regard, the Council has laid down detailed guidelines that are appearing at pages 188–196 of the Code of Ethics, 2009.

(v) Whether a statutory auditor can be appointed in the adjourned meeting in place of existing statutory auditor where no special notice for removal or replacement of the retiring auditor is received at the time of the original meeting ?

Ans. : If any annual general meeting is adjourned without appointing an auditor, no special notice for removal or replacement of the retiring auditor received after the adjournment can be taken note of and acted upon by the company, since in terms of S. 190(1) of the Companies Act, 1956, special notice should be given to the Company at least fourteen clear days before the meeting in which the subject matter of the notice is to be considered. The meeting contemplated in S. 190(1) is undoubtedly the original meeting.

(vi) Whether a Chartered Accountant in practice is entitled to accept teaching assignment ?

Ans. : A Chartered Accountant in practice is allowed to accept teaching assignment in university, affiliated colleges, educational institution, coaching organisation, private tutorship under a specific permission of the Council, provided the direct teaching hours devoted to such activities taken together do not exceed 25 hours a week.

3. Treatment of preliminary expenses incurred on incorporation of a company:

i) Facts:

A company was incorporated in May, 2008 as a wholly-owned subsidiary of a Government of India enterprise under the administrative control of the Ministry of Oil & Natural Gas to implement city gas distribution by participating in the bidding process of the Petroleum & Natural Gas Regulatory Board (PNGRB) and also to set up CNG stations across the National Highway Corridor. The company spent an amount of Rs.1.26 crore towards incorporation expenses (preliminary expenses) during the period May 27, 2008 to March 31, 2009.

As the company had not started the commercial production, the ‘Statement of Incidental Expenditure During the Construction’ (IEDC) had been prepared instead of profit and loss account, complying with the specific requirements of Part II of Schedule VI to the Companies Act, 1956, giving suitable disclosure of specific items of expenditure.

The company had also incurred other pre-operative expenses. It had shown the preliminary expenses and pre-operative expenses in the statement of IEDC. The expenditure under the head IEDC was allocated to capital work-in-progress to be capitalised in future as part of Fixed Assets (AS-10). The company was of the view that the ‘start-up’ cost included expenses incurred for formation expenses of the company (preliminary expenses) as per para 56 of AS-26.

ii) Query:

The question before the Expert Advisory Committee (EAC) was whether the accounting treatment of pre-liminary expenses adopted by the company was in compliance with existing Accounting Standards and other generally accepted accounting principles?

iii) EAC opinion:

The committee, after considering paragraph 56 of AS-26 — ‘Intangible Assets’ and paragraph 9(3) of AS-10

— ‘Accounting for Fixed Assets’, came to the conclusion that the start-up costs of the nature of incorporation expenses (preliminary expenses) incurred for bringing the enterprise into existence in its corporate form cannot be said to be attributable to bringing an asset/project into existence. The requirements of AS-26 would apply to the expenditure incurred on incorporation of the company and not the requirements of AS-10. Accordingly, in accordance with AS-26, such preliminary expenditure should be expensed by way of a charge to the profit and loss account in the period in which these are incurred. Therefore, the committee was of the view that for this purpose profit and loss account will have to be prepared by the company even before the commencement of commercial operations. Since, the company has treated incorrectly the said expenditures in the year of incurrence, it should rectify this mistake in the next year as prior period items in accordance with AS-5. “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”.

(Please refer pages 1425–1426 of C.A. Journal of March 2010)

4. New Committees of the Council:

The Council of ICAI has formed 6 statutory commit-tees and 28 non-statutory committees on 12-2-2010 for one year. Names of chairmen and vice-chairmen of these committees are as under:

i) Statutory Committees:

a) Chairman and Vice-Chairman of Executive, Examination, Finance and Disciplinary Committee (under old regulation) are

Shri Amarjit Chopra (President) and Shri G. Ramaswamy (Vice-President), respectively.

b) Board of Discipline —

Chairman Shri Amarjit Chopra
Disciplinary Committee (Under New S. 21B)— Chairman Shri G. Ramaswamy.

ii) Non-Statutory Committees — (Some Names)

a) Accounting Standards Board

CA Manoj Fadnis (C) and CA S. Santhanakrishnan (VC)

b) Auditing & Assurance Standards Board

CA Abhijit Bandyopadhaya (C) and CA R. S. Adukia (VC)

c) Audit Committee

Shri K. P. Shashidharan (C) and CA S. K. Agarwal (VC)

d) Board of Studies

CA Vinod Jain (C) and CA V. Murali (VC)

e) Direct Taxes Committee

CA J. P. Gokhale (C) and CA M. Devaraja Reddy (VC)
f) Indirect Taxes Committee

CA Bhavana Doshi (C) and CA M. N. Hiregange (VC)

g) Ethical Standards Board

CA Jaydeep Shah (C) and CA K. Raghu (VC)

h) Expert Advisory Committee

CA S. K. Maheshwari (C) and CA Anuj Goyal (VC)

i) International Taxation Committee

CA M. P. Sarda (C) and CA Dhinal A. Shah (VC)

j) Professional Development

CA Pankaj Jain (C) and CA C. S. Nanda (VC)

(For details please refer P. 1493-1497 of C.A. Journal for March, 2010)

5. Auditing Standards:

a) The following Revised Standards on Auditing (SA) have been published in C.A. Journal for March, 2010 at pages stated below. They will apply to Financial Statements for periods beginning on or after 1-4-2010.

i) SA 200 (Revised) — Overall objectives of the Independent Auditors and the Conduct of Audit in Accordance with Standards on Audit-ing (P. 1508–1520).

ii) SA 220 (Revised) — Quality Control for Audit of Financial Statements (P. 1521–1527).

iii) SA 501 (Revised) — Audit Evidence — Specific Considerations for Selected Items (P. 1528– 1530).

iv) SA 505 (Revised) — External Confirmations (P. 1531–1535).

v) SA 520 (Revised) — Analytical Procedures (P. 1536–1539).
vi) SA 620 (Revised) — Using the Work of an Auditor’s Expert (P. 1540-1545)

b) The following Exposure Draft is published on Standard on Assurance Engagements (SAE) 3000:

Assurance Engagements other than Audits or Reviews of Historical Financial Information (P. 1546– 1553).

6. ICAI News:

(Note : Page Nos. given below are from C.A. Journal for March, 2010)

i) New Branches of ICAI:

The following new Branches have been opened by ICAI on 13-1-2010 (P. 1505–1506):

a) Tirupati (SIRC)

b) Bhavnagar (WIRC)
c) Pali (CIRC)

d) Shri Ganga Nagar (CIRC)

e) Ratlam (CIRC)

ii) ICAI New Publications (P. 1498-1500):

        a) e-learning CD on Windows, Network & Wi-Fi Security — An Intro.
        b) e-learning CD on IS Security, Cyber Threats & Review — An Intro.
        c) Technical Guide on IT Migration Audit.

d) Study on Compliance of Financial Reporting Requirements.
e) Technical Guide on Internal Audit of Treasury Functions in Banks.

iii) CA Examinations (P. 1501-1502):

a) PE II, PCE, IPCE and Final Examinations — 3rd to 17th May, 2010.
b) CPT — 20th June, 2010.

ICAI And Its Members

ICAI & Its Members

1. Disciplinary case :

In the case of ICAI v. Sri S. R. Bhandary, the
Registrar of Companies filed a complaint against the member alleging, inter
alia, that during the inspection of accounts of one of the companies,
certain violations of the Companies Act came to light which had a bearing on the
accounts and transactions of the company. The member who had audited the
accounts of the said company failed to report such violation in his audit report
on the accounts of the company.

The Disciplinary Committee and the Council came to the
conclusion that the member was grossly negligent in the performance of his
duties and he was guilty of professional misconduct under Clause (7) of Part I
of Second Schedule to the C.A. Act. The Council recommended to the High Court
that the member be reprimanded.

The Karnataka High Court has observed that the Council was
justified in taking the above view. The High Court has pointed out that the
member had not reported on the following matters.

The member did not qualify the following points in his report
dated 6-4-1992 :

(i) The Company acquired shares at Rs.14,59,510 in two
private limited companies. These investments were in excess of the limits laid
down u/s.372 of the Companies Act, 1956. The Company did not obtain prior
approval from the Government of India.

(ii) The Company paid interest of Rs.2,21,669 on share
application money received pending allotment. The payment was neither
authorised under the Companies Act, nor under the Memorandum and Articles of
Association of the Company. The payment is, therefore, unauthorised.

The High Court agreed with the Council and accepted its
recommendation that the member be reprimanded for his above negligence.

(Refer pages 1519-1520 of C.A. Journal, March, 2008)

2. Whether Auditor of a subsidiary company can be a Director of its
Holding Company :

The Ethical Standards Committee (Committee) of ICAI has
examined this issue in detail. In terms of Clause (II) of Part I of the First
Schedule to the C.A. Act, a practising C.A. cannot engage in any business or
occupation without permission of the Council. He can, however, be a
non-executive director of a company wherein he or any of his partners is not an
auditor. According to the Committee, the public conscience is expected to be
ahead of the law. Members are, therefore, expected to interpret the requirement
as regards independence much more strictly than what the law requires and should
not place themselves in positions which would either compromise or jeopardize
their independence.

In view of the above, the Committee has decided that an
auditor of a subsidiary company cannot be a director of its holding company, as
it will affect the independence of the auditor. On the same analogy, an auditor
of a holding company cannot be a director of its subsidiary company.

(Refer page 1590 of C.A. Journal, March, 2008)

3. Guidelines for fees payable for Special Audit u/s.142(2A) of Income-tax
Act :

As the members are aware, S. 142 (2D) of the Income-tax Act
was amended by the Finance Act, 2007 w.e.f. 1-6-2007. According to this
amendment, the audit fees for a Special Audit ordered on or after 1-6-2007
u/s.142(2A) is to be determined by the Chief Commissioner or Commissioner and to
be paid by the Central Government. For this purpose, guidelines have now been
issued by a Notification dated 5-2-2008 [298 ITR (St) P.1]. A new Rule 14B has
been added in the Income-tax Rules, which provides as under :

(i) Every Chief Commissioner has to maintain a panel of
Chartered Accountants.

(ii) The Chartered Accountant who is required to conduct
such Special Audit u/s.142(2A) has to maintain a time-sheet and has to submit
it to the Chief Commissioner/Commissioner along with his bill.

(iii) The Audit fees will not be less than Rs.3750 per hour
and will not be more than Rs.7500 per hour for the Chartered Accountant,
qualified assistants, semi-qualified and other assistants.

(iv) The Chief Commissioner/Commissioner will ensure that
the number of hours claimed for billing purposes is commensurate with the size
and quality of the report submitted by the Chartered Accountant.

(Refer page 1508 of C.A. Journal for March, 2008)

4. Accounting treatment in respect of amount withheld from a contractor in
respect of customs duty :

The Expert Advisory Committee (EAC) of ICAI has considered
the above issue in its opinion which appears on pages 1489-1492 of C.A. Journal
of March, 2008. In this case, the company had entered into a lump sum turn-key
agreement with a foreign contractor for installation of process plant. The
contractor submitted its bill which included customs duty paid by it. The
company raised objection with regard to payment of the customs duty, on the
ground that evidence in the form of proof of payment of customs duty was not
furnished. The company withheld the payment of customs duty to the contractor.
The matter was referred to an Arbitrator. The company raised the following two
questions :

(i) Whether the accounting treatment of capitalising plant
at the total lump sum price (including taxes and duties) payable to the
foreign contractor for lump sum turn-key contract is in order by providing for
liability for the amount withheld towards balance customs duty on account of
non-submission of customs documents, against which the contractor has invoked
arbitrator proceedings.

(ii) In case the answer to the above question is in the
negative, whether the amount withheld from the contractor, which is under
arbitration, is to be treated as contingent liability.

ICAI And Its Members

ICAI & Its Mebers

1. Disciplinary case :

In the case of ICAI v. Shri V. C. Agarwarl, on the
basis of information given by the ITO, Circle 5(7) Mumbai, a disciplinary case
was registered against the member. In this case the member audited the books of
WIE P. Ltd. and also conducted audit u/s.44AB of the Income-tax Act. During the
course of assessment proceedings of the company, the ITO noticed that there were
cash deposits in the bank account of the company. In the audited accounts this
was shown as cash sales. It was also shown in the audited accounts that the
company carried on trading activities whereas, the ITO on inquiry, found that
the company was only acting as Hawala broker and cash deposits related to Hawala
business.

The disciplinary committee conducted the enquiry. The member
did not attend before the committee but made written representation. The
committee held that the member was guilty of professional misconduct under
clauses (5) to (8) of Part I of the Second Schedule of the C.A. Act. This
finding was accepted by the Council which recommended to the High court that the
name of the member be removed for a period of six months.

The Bombay High Court has accepted the findings of the
Council and confirmed the penalty of removal of the name of the member for six
months. (Refer page 646 of C.A. Journal for October, 2008).

2. Guidelines for members of ICAI :

Prior to the enactment of the Chartered Accountants
(Amendment) Act, 2006, clause (ii) of Part II of the Second Schedule to the C.A.
Act authorised the Council of ICAI to issue a Notification whereby it could
provide that a member of ICAI would be held guilty of professional misconduct if
he is guilty of such act or omission as may be specified by the Council in the
Notification issued under this clause. Since this power of issuing such
Notification is not given to ICAI by amendment of the above Schedule by the
Amendment Act of 2006, old Notifications issued from 1965 to 2004 have now been
repealed w.e.f. 8-8-2008.

ICAI has now issued ‘Council General Guidelines, 2008’ by a
Notification dated 8-8-2008. These guidelines are published at pages 686-689 of
C.A. Journal of October, 2008. These guidelines deal with the following subjects
which were covered by the various Notifications issued from 1965 to 2004 under
erstwhile clause (ii) of Part II of Second Schedule to the C.A. Act :

(i) Conduct of a member being an employee.

(ii) Prohibition of appointment of member as cost auditor.

(iii) A member shall not express opinion on financial
statements of any business or enterprise in which one or more of his
relatives, either by themselves or in conjunction with such member, has
substantial interest in such business or enterprise. It may be noted that
under the earlier Notification dated 20-3-1971, under clause (ii) of Part II
of Second Schedule, it was provided that if such opinion is expressed, the
member should disclose his interest in his report. Under the above guidelines,
such member is prohibited from expressing his opinion on financial statements
of any enterprise in which he and/or his relatives have substantial interest.

(iv) Maintenance of books of accounts by a member in
practice or a firm of Chartered Accountants.

(v) Ceiling on tax audit assignments u/s.44 AB of the
Income-tax Act.

(vi) Appointment of an auditor in case of non-payment of
undisputed fees to previous auditor.

(vii) Specified number of audit assignments under the
Companies Act, 1956. This specified number under the Companies Act is 20
audits of public companies per partner (including 10 audits of public
companies with paid-up share capital of Rs.25 lacs or more). It may be noted
that this ceiling of 20 audits does not apply to audits of private companies.
Therefore, the Council of ICAI had decided in 2001 that an overall ceiling of
30 for public and private company audits (including 10 audits of public
companies with paid-up capital of Rs.25 lacs or more) should be observed by
members. The member/firm is required to maintain a register relating the
ceiling of 30 audits giving the particulars of (a) name of the company, (b)
registration No. of the company, (c) date of appointment, (d) date on which
Form 23-B filed with ROC.

(viii) Appointment of statutory auditor — A member or his
firm cannot accept fees for other assignments for fees exceeding the statutory
audit fees.

(ix) A member who is indebted to a concern for an amount
exceeding Rs.10,000 cannot accept audit of that concern.

(x) Directions of Council/committee in case of unjustified
removal of auditors is binding on members.

(xi) Minimum audit fees in respect of audits in specified
cases.

3. Amendments to C.A. Regulations :

By a Notification dated 25-9-2008, C.A. Regulations, 1988
have been amended. Some of the important amendments are as under :

(i) List of members as on 1st April every year will now be
available to members only on payment of cost. The rates for Western, Southern
and Northern Regions are Rs.500 each, for Eastern Region Rs.300, for Central
Region Rs.400 and for All India Rs.750 per copy.

(ii) Any person, (other than the Central or State Government
or any statutory authority) desiring to file a complaint against a member will
have to pay a fee of Rs.2,500. The procedure for conducting an enquiry against a
member on the basis of information or complaint shall be as specified in the
‘Chartered Accountants (Procedure of Investigations of Professional and other
Misconduct and Conduct of Cases) Rules, 2007’.

(iii) A member in C.A. practice can now share his fees from
professional practice with other professionals or can get a share from the fees
of such other professionals or accept professional assignments by an arrangement
with such other professionals. For this purpose, the list of such other
professionals is provided in new Regulation 53A as under :

(a)    Company Secretary,
(b)    Cost Accountant,
(c)    Actuary,
(d)    RE.,
(e)    R Tech,
(f)    Architect
(g)    Lawyer, and
(h)    MBA.

(iv) New Regulation 53B now permits a CA. in practice to enter into partnership with (a) Company Secretary, (b) Cost Accountant, (c) Advocate, (d) Engineer, (e) Architect, and (f) Actuary. It may be noted that these professionals should be members of their respective regulatory bodies. Further, it will have to be ensured that these regulatory bodies permit their members to enter into such partnerships.

(v) Amendments are made in the following Regulations dealing with certain administrative matters :
(a) 137Co-option by Regional Council

(b) 175Functions of Executive Committee

(d) 194Maintenance of Accounts

(e) 197Comparison of Actual Income & Expenditure with Budget Estimates.

4. Accounting Standards:

(i) Accounting Standard (AS-32) – Financial Instruments – Disclosures:

(Note: Page Nos. given below are from CA. Journal for October, 2008)

Text of AS-32 is published on pages 690-705. This standard is recommendatory for accounting periods commencing on or after 1-4-2009 and mandatory for accounting periods commencing on or after 1-4-2011. The principles in this standard complement the principles for recognising, measuring and presenting financial assets and financial liabilities in AS-30 – Financial Instruments – Recognition and Measurement and AS-31 – Financial Instruments – Presentation.

(ii) Limited Revision of AS-19 – Leases:

This limited revision of AS-19 (Leases) is consequential to issue of AS-32 dealing with Financial Instruments – Disclosures. (Refer Page 705)

(iii) Exposure Draft – Accounting Standard (AS- 2) (Revised) :

Exposure Draft of Revised AS-2 – Inventories is published for comments by members on pages 724-727.

5. Standards on Auditing (SA) :

(Note: Page Nos. given below are from c.A. Journal of October, 2008)

(i) SA580 – Written representations:

The above standard is revised and published on pages 706-710. Earlier this standard was known as ‘Representations by Management’ AAS-11.

(ii) Exposure Drafts:

The following Exposure Drafts are published for comments by members:

(a) Audit Considerations Relating to an Entity Using a Third Party Service Organisation (Revised) SA-402 with Explanatory Memorandum (Pages 728-736).

(b) Initial Audit Engagements – Opening Balances with Explanatory Memorandum – (Re-vised) SA 510 (Pages 737-741).

6. Standards on Internal Audit (SIA) :

(Note: Page Nos. given below are from c.A. Journal of October, 2008)

(i) Framework for standards on Internal Audit:

ICAI has decided to publish standards on Internal Audit (SIA). The framework for these standards is published on page 711.

(ii) SIA-4 – Reporting:

The purpose of this standard is to establish standard on the form and content of Internal Auditor’s Report. This is published on pages 712-714.

(iii) SIA-5 – Sampling:

This standard explains the design and selection of an audit sample for Internal Audit. It is published on pages 714-718.

(iv) SIA-6 – Analytical Procedure:

SIA-6 establishes standard on the application of analytical procedures during an internal audit. This is published on pages 718-721.

(v) SIA-7 – Quality Assurance in Internal Audit:
The purpose of SIA-7 is to establish standards and provide guidance regarding quality assurance in internal audit. This is published on pages 721-723.

(vi) Exposure Drafts:

Following Exposure Drafts are issued for Standards on Internal Audit (SIA) :
(a) Terms of Internal Audit Engagement (Pages 742-743).

(b) Internal Audit Evidence (Pages 743-744).

(d) Co-ordination with External Auditors (Pages 746-747).

(e) Consideration of Fraud in Internal Audit (Pages 747-748).

7. ICAI News:

(Note: Page Nos. given below are from C.A. Journal for October, 2008)

(i) ICAI Awards for 2008 to members in industry :

ICAI has decided to honour members in industry for 2008 on 25th January 2009. The Awards will be given under three categories viz. (a) Business Achievers,

(b) Chief Financial Officers (CFO’s), and (c) Professional Achievers. Nominations are invited for this purpose by 30-11-2008 (Refer pages 589 and 669).

(ii) Convocation for new members of ICAI :

First ICAI convocation to give away Certificate of Passing CA. Final Examination, Certificate of Membership and Certificate of Practice to new members will be held at New Delhi on 2-11-2008. Similar convocation will be held at various Regional Centres later on (Refer pages 588 and 596).

(iii) Common Proficiency Test (CPT) – ONLINE Examination:

ICAI has decided that in addition to the existing paper-pencil mode of CPT Examination to be held on 14-12-2008, online Examination will also be held on 7-12-2008 in 11 cities viz. Ahmedabad, Mumbai, Pune, Nagpur, Chennai, Bangalore, Hyderabad, Kolkata, Kanpur, Jaipur and New Delhi. Students will have option to select anyone mode of examination. (Details on page 596)

(v) SIA-7 – Quality Assurance in Internal Audit:

The purpose of SIA-7 is to establish standards and provide guidance regarding quality assurance in internal audit. This is published on pages 721-723.

(iv) Enhancing Audit Quality:

Some observations made by Reviewers while conducting peer review are listed in order to enable the members to improve the quality of audit of corporate bodies. (Page 655)

(v) Accounting Technician Course:

As reported earlier, ICAl proposes to introduce a new course called ‘Accounting Technician Course’ to enable students who are not able to complete CA. course to get a certificate as ‘Accounting Technician’. Draft Regulations for this purpose are published for comments by members at pages 682 to 685.

(vi) New Publications of lCAl :

(a) Technical Guide on Accounting for Micro-finance Institutions (Page 678).

(b) Introduction to WTO and Opportunities for CAs in International Trade Laws and WTO (Page 678).

(c) Compendium of Standards and Statements on Auditing as on 1-4-2008 Vol. I and Compendium of Guidance Notes Vol. II (Page 679).

(d) A study on Basel II and Risk-based supervision (Page 679).

(e) Frame work for Standards on Internal Audit and Standards on Internal Audit (SIA) 4 – Reporting, SIA 5 – Sampling, SIA 6 – Analytical Procedure, and SIA 7 – Quality Assurance in Internal Audit (Page 680).

ICAI And Its Members

1. Disciplinary case :

In the case of ICAI v. Shri Sandeep Abbott, a firm engaged in share trading filed a complaint against the member. In this complaint it was alleged that the member induced the complainant to become his client by giving free swot scan (stock market review by CAs) offering useful tips. This swot scan did not come till the close of his business. It was also alleged that the member was engaged in the business of brokership of shares besides his practice as an auditor. It was further alleged that the member had not disclosed in his statement the deliveries not given to the complainant and shares which were sent for transfer on behalf of the complainant. Further, the member had not given to the complainant the right or preferential quota for the said shares. It was also alleged that the member had sold some shares without consent of the complainant and not paid the sale proceeds of the shares to the complainant.

When the case was referred to the Disciplinary Committee of ICAI (DC), the member did not appear at the time of hearing and did not make any written representation in his defence. After considering the documents and evidence produced by the complainant, the committee decided that the member was guilty of professional misconduct under clause (11) of the First Schedule (Engagement in other occupation) and of ‘Other Misconduct’ u/s.22 of C.A. Act.

The Council accepted the above finding of the D.C. The member did not appear before the Council and did not send written representation. As regards the first charge, it was decided by the Council that the name of the member be removed from the Register of Members for a period of 6 months. As regards the 2nd charge that the member was guilty of ‘Other Misconduct’, the Council recommended to the Delhi High Court that the name of the member be removed for a period of 3 months.

The Delhi High Court noted that the member did not appear before the D.C., the Council as well as the High Court. After considering the report of DC/Council, the High Court directed that the name of the member be removed for a period of 3 months. (C.A. Journal August, 2009, Page 220).

2. Valuation of Material-in-Transit (EAC Opinion) :

A govt. company is in the business of refining and marketing of petroleum products. It has refineries for processing crude oil and lube blending/filling plants. The main raw material for processing in the refineries is crude oil which is both imported and indigenously procured. On the date of Balance sheet, a few shipments of crude oil are in transit. The company also imports other products which can also be in transit on the Balance sheet date.

The crude oil cargos are generally lifted from load port on FOB basis and consequently the ownership of the goods shipped vests in the company. Once the tanker is loaded from the port, liability for associated expenses like freight, insurance, customs duty, survey fees, wharfage and handling charges (herein referred to as incidental expenses) becomes the cost to the company. The company makes provision for these expenses, irrespective of whether the material enters the Indian territorial waters or not before the Balance sheet date. The company values the crude oil-in-transit as well as other material-in-transit at the Balance sheet date inclusive of all such incidental expenses. The company sought the opinion of Expert Advisory Committee (EAC) of ICAI as to whether this method of valuation of crude oil-in-transit (material-in-transit) was in order.

The EAC has considered paras 6, 7, 11 and 13 of AS-2 (Valuation of Inventories) and given the opinion that the above method of valuation of material-in-transit was not in order. According to the EAC, only those expenses which contribute to bringing the inventory to its present location and condition can form part of the cost of the inventory. Therefore, the liability for the expenses for (i) freight, (ii) handling charges at the load port (iii) customs duty on imported cargo, and (iv) wharfage should be recognised in the books of account in respect of material-in-transit only when those are incurred or the liability in respect of the same has arisen. As regards insurance and survey fees, the same should not be included in the valuation, unless they are mandatory i.e., without which the material cannot be moved or transported from the port. (Refer page 221-222 of C.A. Journal, August, 2009).

3. Exposure Draft of AS-1 (Revised)

— Presentation of Financial Statements :

ICAI has issued the above exposure draft. This Exposure Draft is issued pursuant to the decision to converge with IFRSs in respect of accounting periods commencing on or after April 01, 2011. This corresponds with IAS-1.

The objective of the Standard is to prescribe the basis for presentation of general purpose financial statements to ensure comparability both with the entity’s financial statements of the previous periods and with the financial statements of other entities. The general purpose financial statements are those intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs.

The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to wide range of users in making economic decisions.

A complete set of financial statements comprises : (a) a statement of financial position at the end of the period; (b) a statement of comprehensive income of the period; (c) a statement of changes in equity for the period; (d) a statement of cash flows for the period; (e) notes, comprising a summary of significant accounting policies and other explanatory information; and (f) a statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements. An entity is required to present a complete set of financial statements (including comparative information) at least annually.

This Accounting Standard is mandatory for accounting periods commencing on or after April 01, 2011.

This Standard also gives guidance for implementation and has also given illustrative presentation of financial statement. [Refer pages 317 to 334 of ICAI Journal, August, 2009].

4. Auditing standards :

The following Auditing Standards have been issued and published on pages indicated below in the CA.

Journal for August, 2009. These are effective on all audits relating to accounting periods beginning on or after 1-4-2010.

i) Standard on Auditing (SA) 320 (Revised) :

Materiality in Planning and Performing an Audit (P. 335-338).

ii) Standard on Auditing (SA) 402 (Revised):

Audit Considerations Relating to an Entity Using a Service Organisation (P. 339-346).

iii) Standard on Auditing (SA) 450 :

Evaluation of Misstatements Identified During the Audit (P. 347-350).

iv) Standard on Auditing (SA) 610 (Revised) : Using the Work of Internal Auditors (P. 351-353).

5. NBFC Auditors’ Report:

Reserve Bank of India has issued directions called ‘Non-Banking Financial Companies Auditors’ Report (Reserve Bank) Directions, 2008′. They have been notified by a Circular dated 1-7-2009 and they have come into force on that date. Full text the directions is published on P. 288-291 of CA. Journal, August 2009.

6. Transfer/Termination of articleship :

ICAl has clarified, by a Notification dated 30-6-2009, that transfer/termination of articleship of articled assistants under Regulation 56(1) will be permitted under the following circumstances only:

“(a) Medical grounds requiring discontinuance of articles for a minimum period of three months (on production of a medical certificate issued by a Government hospital).

b. Transfer of a working parent to another city involving a distance of minimum 50 kms (on production of a certified copy of the transfer order and the proof of relocation to another city).

c. Misconduct involving mortal turpitude.

d. Other justifiable circumstances/reasons:

i. Grounds already permissible in the Char-tered Accountants Regulations, 1988 (on submission of requisite proof of the act warranting transfer/termination of article-ship) :

a) Industrial training (Regulation 51).

(b) Secondment of articles (Regulation 54).

c) Conversion from PCC to lPCC (for termination of articles only. Re-registration of articles to be allowed only after passing Croup-I of lPCC).

(d) Death of Principal [Regulation 57(1)(c)]

e) Ceasing of practice by the Principal [Regulation 57(1)(a)].

f) Removal of name of the Principal from the Register of Member due to any reason [Regulation 57(1)(b)].

ii. Marriage basis (only if there is relocation to another city involving distance of 50 kms).

iii. Irregular payment or non payment of stipend with reference to Regulation 67.

iv. Articled assistant desires to serve balance period of training outside India.

v. Shifting by the principal to another city involving distance of more than 50 kms.

The articled assistants are required, in the first instance, to get the consent of the Institute before getting Form 109 signed by the Principal, in their own interest.

The request, on anyone or more of the aforesaid grounds, of an articled assistant on plain paper with recommendations of the Principal for transfer/termination of articleship accompanied by evidence/ proof (self-attested by the articled assistant) to the satisfaction of the Institute be made.”

7. Campus Placement Programme:
As in the past, ICAI has organised Campus Placement Programme for providing opportunity to our students who have qualified in CA. Final Examinations held in May, 2009. The campus placement interviews will be held at the following places on the dates mentioned below:

8. Know Your Ethics:

The Ethical Standards Board has issued certain clarifications about ICAI Ethical Standards which are published on page 192 of CA. Journal for August, 2009. The following clarifications may be noted:

i) Management consultancy companies floated by Chartered Accountants can receive remuneration from an employer based on percentage of the annual CTC of the candidate while providing services relating to recruitment or placement of such candidate. However, a firm of Chartered Accountants is not permitted to charge fees on percentage of CTC of the candidate for rendering similar services.

ii) A Member who is in practice cannot use the designation of ‘District Governor’ in his Rotary Club visiting card along with the word ‘Chartered Accountant’.

iii) It is not permissible for a member of ICAI, who is practising as an advocate, to use CA logo on his personal stationery, visiting cards, etc.

9. ICAI News:

(Note: PageNos. given below are from c.A. Journalof August, 2009)

i) lCAl Elections:

Elections to the 21st Council and 20th Regional Councils will take place on 4th and 5th December, 2009. Details about these elections are put on the web site of ICAI www. icai.org. (Page 306).

ii) lCAl MOTO Song:
ICAI MOTO song instills a sense of pride amongst members of our Institute and expresses our solidar-ity with the Institute. This is uploaded on the web site of lCAl. (Page 188).

iii) Membership Card:
ICAI is issuing membership cards. Those who have not so far obtained this card can apply to ICAl. (Page 188).

(iv) Payment of Annual Membership Fees:
ICAI has issued a clarification that the Annual Membership Fees and Certificate of Practice Fees for 2009-10was payable on 1-4-2009.If any member has not paid the fees so far he/she can make the payment on or before 30-9-2009. (Page 308)

(v) New Branch of ICAl :
119th Branch in Western Region has been opened at Vapi w.e.f. 9-7-2009. (Page 300)

(vi) Publications of ICAl :
(a) Technical Guide on Internal/Concurrent Audit of Investment Functions of Insurance Companies (Page 299)
(b) Micro Insurance (Page 299)
(c) Technical Guide on Internal Audit of Intangible Assets (Page 300)

ICAI And Its Members

1. Know Your Ethics :

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(i) Facts :

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

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

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

(ii) Query :

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

iii) EAC opinion:

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

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

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

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

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

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

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

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

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

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

4. Scheme for Secondment of Articled Trainees:

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

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

iii) The member to whom the articled trainee is seconded will not be entitled to train more than two such trainees on secondment at a time.

iv) The aggregate period of secondment shall not exceed one year, provided that the period served on secondment with any one member or his partner shall not exceed six months.

v) Where an articled trainee is seconded to a member in industry, the total period spent in industry by the articled trainee including the period of industrial training under the Chartered Accountants Regulations, shall not exceed one year.

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

vii) The Principal shall keep a record of the training undergone during secondment and include its particulars in the report to the Council under Regulation 64.

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

5. ICAI News:

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

i) New ICAI Chapter in UAE:

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

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

iii) Group to Resolve Dispute for Members:

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

iv) Unique Code Numbers:

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

v) New publications of ICAI:

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

ICAI And Its Members

1. Retrospective Amendment of Accounting Standard (AS-11)

By a Gazette Notification dated 31.3.2009, the Central Government has amended Accounting Standard (AS-11) dealing with “The Effects of Changes in Foreign Exchange Rates” as notified by the Companies (Accounting Standard) Rules, 2006. It may be noted that para 46 has been added in this Accounting Standard with retrospective effect from 7th December, 2006. This para reads as under :

“46. In respect of accounting periods commencing on or after 7th December, 2006 and ending on or before 31st March, 2011, at the option of the enterprise (such option to be irrevocable and to be exercised retrospectively for such accounting period, from the date this transitional provision comes into force or the first date on which the concerned foreign currency monetary item is acquired, whichever is later, and applied to all such foreign currency monetary items), exchange differences arising on reporting of long-term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, insofar as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset, and in other cases, can be accumulated in a ‘Foreign Currency Monetary Item Transaction Difference Account’ in the enterprise’s financial statements and amortised over the balance period of such long-term asset/liability but not beyond 31st March, 2011, by recognition as income or expense in each of such periods, with the exception of exchange differences dealt with in accordance with paragraph 15. For the purposes of exercise of this option, an asset or liability shall be designated as a long-term foreign currency monetary item, if the asset or liability is expressed in a foreign currency and has a term of 12 months or more at the date of origination of the asset or liability. Any difference pertaining to accounting periods which commenced on or after 7th December, 2006, previously recognised in the profit and loss account before the exercise of the option shall be reversed insofar as it relates to the acquisition of a depreciable capital asset by addition or deduction from the cost of the asset and in other cases by transfer to ‘Foreign Currency Monetary Item Translation Difference Account’ in both cases, by debit or credit, as the case may be, to the general reserve. If the option stated in this paragraph is exercised, disclosure shall be made of the fact of such exercise of such option and of the amount remaining to be amortised in the financial statements of the period in which such option is exercised and in every subsequent period so long as any exchange difference remains unamortised.”

From the retrospective amendment of AS-11, it will be possible for all corporate bodies to exercise the option to restate their long-term Foreign Currency Monetary Items acquired during accounting periods commencing on or after 7.12.2006. The effect of this amendment will be as under :

(i) If the long term Foreign Currency Monetary Item relates to other than an acquisition of a depreciable capital asset, exchange differences should be accumulated in the “Foreign Currency Monetary Item Transaction Difference Account” and amortised over the life of the monetary item but not beyond 31 March, 2011.

(ii) If the long-term Foreign Currency Monetary Item relates to acquisition of a depreciable capital asset, exchange differences arising on such monetary items should be added to or deducted from the cost of the asset.

By a separate notification dated 31/3/2009, the Central Government has also amended Schedule VI of the Companies Act. By this amendment the second paragraph along with explanation 1 and explanation 2 of the instructions under the head ‘Fixed Assets’ has been deleted with effect from 31.3.2009. The effect of this amendment will be that the requirement of capitalisation of foreign exchange difference relating to the liability incurred for acquiring fixed assets purchased from a foreign country, gets removed. Therefore, if any fixed assets are purchased from a foreign country by taking loan in foreign currency, the foreign exchange difference will have to be recorded as provided in AS-11 as modified by Para 46 inserted w.e.f. 7.12.2006.

2. Limited Liability Partnership

The Central Government has issued a Notification u/s. 1 (3) of the Limited Liability Partnership Act, 2008 (LLP Act) on 31st March, 2009. notifying that LLP Act has come into force from that date. LLP Rules, 2009 and forms are also notified by a separate Notification. The Ministry of Corporate Affairs has now started registering LLP under the LLP Act/Rules.

It may be noted that the position of LLP under the Income-tax Act is not yet clarified. Unless this position is clarified, the existing partnership firms or unlisted companies may not exercise the option of conversion into LLP status. Even new partnership to be formed hereafter may not like to register as LLP unless the position under the Income-tax Act and Wealth-tax Act is clarified.

The LLP Act is silent regarding taxation of LLP under the Income-tax Act. The basic structure of LLP is that of a partnership and the only difference is that the liability of partners is limited. Therefore, the Government should grant the status of a ‘Firm’ to LLP for the purpose of Income-tax Act. In other words, the definition of the words ‘Firm’, ‘Partner’ and ‘Partnership’ in Section 2 (23) of the Income-tax Act should be so amended that it includes definition of these words under the LLP Act. Once this is done, there will be no need to amend other provisions of the Income-tax Act. Accordingly, LLP will pay tax at the flat rate applicable to a ‘Firm’ and it will get deduction for interest and salary to working partners as provided in Section 40 (b) of the Income-tax Act. Share of profit received by a partner from LLP will be exempt from tax. Losses of LLP will be allowed to be carried forward in the hands of the LLP. Other provisions relating to changes in constitution of LLP, dissolution, conversion of LLP to the status of company etc. will apply as they presently apply in the case of a Firm.

3. Working Hours of Articled Assistants

The Council of ICAI has taken certain decisions relating to working hours for training of articled assistants. Some decisions, among others, relate to the minimum and maximum working hours for the articled assistants per week, the course of action required to be taken in case the minimum working hours exceed, etc. These decisions are as follows:

i) The minimum working hours for the articled assistants shall be 35 hours in a week excluding the lunch break.

ii) The office hours of the principal for the articled assistants shall not be generally before 9.00 a.m. or after 7.00 p.m.

iii) The normal working hours of the articled assistants shall not start after 11.00 a.m. or end before 5.00 p.m.

iv) If the exigencies or nature of training so warrants, the articled assistant shall work beyond the normal office hours. However, the maximum working hours for the articled assistants should not normally exceed 35 hours in a week, excluding the lunch break and in any case or circumstances should not exceed 45 hours per week. In case the articled assistant is required to work beyond 35 hours per week, he/she is entitled to compensatory leave calculated with reference to the number of completed hours worked over and above 35 hours per week. The principal shall ensure that long , working hours are not imposed on the articled assistants on a regular basis, and only in case of exceptional circumstances where time-bound work is to be delivered, the articled assistants may be required to work longer hours which will still be subject to a maximum of 45 hours per week. The principal shall be free to allow compensatory leave or off hours in lieu of extra working beyond 35 hours.

(Source: Communication from Secretary, dated 3.4.2009)

4. Auditing Standards

The following Auditing Standards are issued by the Institute.

(i) Standard on Auditing (SA) 500 (Revised)- ‘Audit Evidence’. This Standard was hitherto known as SA 500 (AAS-5) ‘Audit Evidence’. The revised standard is effective for audits of financial statements for periods beginning on or after 1st April, 2009.

(Refer pages 1818 – 1825 of C.A. Journal for April, 2009)

ii) Standard on Auditing (SA) 720 – “The , Auditor’s Responsibility in Relation to other Information in Documents containing Audited Financial Statements”. This standard is effective for audits of financial statements for periods beginning on or after 1st April, 2009.

(Refer pages 1826 – 1828 of C.A. Journal for April, 2009)

5. ICAI News

(Note: The page nos. given below are from C.A. Journal for April, 2009)

i) Chapter of ICAI in Singapore

The Singapore Government has permitted leAl to open a chapter in Singapore. This will be inaugurated in April/May, 2009. (page 1668)

ii) International Conference at Agra

As part of the Diamond Jubilee celebrations of ICAI, an International Conference will be held at Agra from 3rd to 5th July, 2009. The theme of the conference will be “Winds of Challenges – Global Strategies for Accounting Profession”. (page 1669)

(iii) ICAI Publications
(a) Compendium of Standards on Internal Audit

(b) Manual on Internal Audit

(d) Training Material on Internal Audit

(e) Compendium of Opinions, Vol. I to Vol. XXV on CD.

(f) Handbook of Auditing Pronouncements (2008 Edition) (Vol. I & II)

(g) Practitioner’s Guide to Audit of Small Entities

(h) Implementation Guide to Risk-based Audit of Financial Statements

(i) Guidance Note on Audit of Banks ( 2009 Edition)
(Refer page 1808 – 1809, 1812 – 1813)

(iv) Master in Business Finance
ICAI has introduced a Certificate Course in ‘Master in Business Finance’. This course is open to members of ICAI and those students who have passed their final examination. Registration for 2009-10 session is in progress. The classes will be held on Saturdays/Sundays at Mumbai, New Delhi, Chennai and Kolkata from 1st June, 2009 (page 1811).

(v) ICAI Examinations
(a) PE-II, PCE, Final and all other examinations will be held from 1st to 15th June, 2009.

(b) CPT examination will be held on 28.6.2009

ICAI And Its Members

ICAI and its Members

1. Accounting treatment of advance to subsidiary pending
finalisation of modalities of issue of the shares :

A public limited company (P.C. Ltd.) which is a wholly-owned
subsidiary of a listed government company, is in the business of exploration and
production of oil and gas and other hydrocarbon-related activities outside
India. P.C. Ltd. has acquired 100% share capital of a Cyprus-based company
(ABC). During the same year, ABC acquired the entire issued share capital of a
UK-based company (XYZ). The funds for the acquisition of XYZ amounting to USD
1,922 million were provided by P.C. Ltd. to ABC with the intention to treat it
as share application money without entering into any formal agreement at the
time of remittances. Further, P.C. Ltd. has advanced USD 53 million to ABC for
XYZ’s business requirements.

Subsequently, P.C. Ltd. entered into a ‘Shareholders’
Investment Agreement’ with ABC. As per the terms of shareholders’ Investment
Agreement, ABC will issue preference/equity shares at a mutuality agreed premium
rate. The agreement makes clear the intention to convert the advance of USD
1,922 million given for acquisition of XYZ into preference/equity shares.
However, no concrete modalities regarding vital issues of the shares like,
nature of shares (i.e., equity/preference shares), number of shares, face
value and premium, etc., are firmed up till the balance-sheet date. No written
agreement is in place regarding the settlement of advance of USD 53 million
given for meeting XYZ’s business requirements. However, P.C. Ltd. intends to
convert this advance also into equity/preference shares and the advance is not
likely to be refunded in near future. As the shares are yet to be issued, the
amount of USD 1,975 paid by P.C. Ltd. to ABC has been shown as ‘Advance to ABC’
in Schedule, ‘Loans and Advances’ in the stand-alone financial statements.

As P.C. Ltd. intends to convert the advance of USD 1,975
(1,922 + 53) into equity/preference shares, the advance given to ABC, has been
considered as an extension to the net investment of P.C. Ltd. in ABC, which is a
non-integral foreign operation. Therefore, the net investment in ABC has been
revalued and accounted for in accordance with the requirements of Paragraph 15
and 16 of Accounting Standard (AS) 11. P.C. Ltd. has revalued the advance of USD
1,975 million at the foreign exchange rate at the year-end rate. The credit for
the same amount has been given to ‘Foreign Exchange Translation Reserve’.

However, the C&AG while carrying out their review
u/s.619(3)(b) objected to the above accounting treatment of showing the amount
of USD 1,922 million paid to ABC towards financing acquisition cost of XYZ as
‘Advance’, as in their view, the amount should be shown as ‘Investment (Share
Application Money pending allotment)’ and, therefore should not be revalued in
accordance with Accounting Standard (AS) 13. Further, the C&AG questioned the
credit of the amount arising on revaluation of USD 53 million to ‘Foreign
Exchange Translation Reserve’ instead of taking it to the profit and loss
account, as in their view, the foreign exchange revaluation gain is of revenue
nature.

Query :

In view of the above stated facts, P.C. Ltd. sought the
opinion of the Expert Advisory Committee (EAC) on the appropriate accounting
treatment of advances so paid and treatment of foreign exchange gain/loss
arising on revaluation thereof.

EAC opinion :

EAC has taken the view that accounting treatment in the case
of P.C. Ltd. would depend upon whether the funds advanced to ABC for acquisition
of shares in XYZ and for meeting XYZ’s business requirements can be regarded as
a monetary item or as a non-monetary item. The Committee noted the Accounting
Standard (AS) 11 and came to the conclusion that shareholder’s investment
agreement with ABC only contains the intention to convert the said advance into
preference/equity shares, and no concrete modalities regarding nature of shares
(i.e., equity/preference shares), number of shares, face value, premium,
etc., have been decided till the balance-sheet date. The EAC noted that in
respect of an advance of USD 53 million P.C. Ltd. intends to convert this
advance also into equity/preference shares. However, no agreement in respect
thereof has been entered into or any modality for such conversion has been
decided till the balance-sheet date. Accordingly, the EAC is of the view that
both the advances are of the nature of monetary items. Further, the EAC is also
of the view that accounting treatment followed by the company for the treatment
of the advance of USD 1,975, revaluation of advances and credit of foreign
exchange revaluation gain to Foreign Exchange Translation Reserve is
appropriate.

(Refer pages 1248 to 1252 of C.A. Journal of February, 2011)

2. Our new President and Vice-President :

Shri G. Ramaswamy from Coimbatore has been elected as
President of ICAI on 12th February. Shri Jaydeep Shah from Nagpur has been
elected as Vice-President of ICAI on 12th February. Our greetings and best
wishes to both of them. We wish them a successful term of office in 2011-12.

3. New Chairman of NACAS :

Shri M. M. Chitale, Mumbai, former President of ICAI, has
been appointed as Chairman of National Advisory Committee on Accounting
Standards in place of Shri Y. H. Malegam w.e.f. 31-1-2011 for one year. This
committee is also reconstituted. We wish to convey our greetings and best wishes
to Shri Chitale and wish him and his colleagues a successful term of office in
2011-12.

4. New Minister for Corporate Affairs :

Shri Murli Deora from Mumbai has taken charge as the new
Minister of Corporate Affairs on 20-1-2011. He is known to be a seasonal
industrialist, a proactive social worker and a soft but determined leader. His
Ministry oversees the affairs of ICAI. Our greetings and best wishes to Shri
Deora. We wish him a successful term of office. (Page 1181)

5. MoU with Canada C.A. Institute :

ICAI has signed a MoU with Canadian Institute of Chartered
Accountants for reciprocal membership arrangements. This MoU will facilitate
mobility of members across the borders and further strengthen the ties between
India and Canada. The MoU will establish closer working linkages as well as
provide recognition for members of the two institutes in the respective
countries. (Press Note of ICAI dated 7-2-2011)

6. ICAI News :

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

(i) Recognition for PhD Courses for CAs :

Institute of Management, Kozhikode (Kerala) and National Law
School of India, Bangalore, have extended a facility to our members to pursue
Fellow Programme i.e., PhD programme. (Page 1149)

(ii) Arrangement with Microsoft :

Special pricing (at very low rates) has been worked out with Microsoft for ICAI members and students. This is a part of the Academic Licensing for providing the latest edition of MS Windows and MS Office. (Page 1149)

iii) Significant achievements and major decisions by Council of ICAI in 2010:
b) Details of some significant achievements by ICAI since February, 2010, are given on pages 1152 to 1168.

a) Details of major Council decisions since February, 2010, are given on pages 1170 to 1180.

iv) ICAI International Conference

International Conference on Role of Accountancy Profession in Sustained Economic Growth was organised by ICAI from 4th to 6th January, 2011, New Delhi. Highlights of the conference proceedings are given on pages 1186 to 1196.

v) Tax issues from conveyance of IFRS with accounting standards:

ICAI has drafted 35 accounting standards after the convergence of IFRS and sent it to the Government for Notification under the Companies Act. (Refer Page 1152). A study group comprising some Council Members and representatives of CBDT was constituted for study of tax issues arising out of convergence of existing accounting standards with IFRC. This Group has prepared a position paper identifying these tax issues and making certain suggestions for amendments in the Income-tax Act and the Companies Act. This position paper is published on pages 1254 to 1263.

(vi) New books released by ICAI:
(a) Technical Guide on Audit of NBFCs.
(b) Practical Approach to General Insurance Management.
(c) Social Audit of Public Money.
(d) Excellence in Financial Reporting Illustrative Guide to Presentation and Disclosures.
(e) Drafting, Conveyancing, Registration and Stamping of Commercial and other Documents.
(f) Changing Times in Government Accounting — A Status Report.
(g) Study on Co-ordination of Internal Auditor with Functional Heads.

(vii) New branches and buildings of ICAI:
The following new branches and buildings at branches have been opened by ICAI:
(a) Latur branch of WIRC.
(b) Ganganagar branch of CIRC.
(c) New building at Bhilai branch of CIRC.
(d) New building at Sangrur branch of NIRC.
(Refer Page 1149)

ICAI And Its Members

ICAI and Its Members

1. Disciplinary Case

In the case of ICAI vs Shri Lokesh Dhawan (reported on page
1230 of C.A. Journal, February, 2010 issue), the member was a partner of a firm
of Chartered Accountants which was appointed as a statutory auditor of a public
sector bank. In the complaint filed by this bank, it was alleged that: (i) the
member had demanded and collected from the bank large sums of money as advance
for T.A. and other expenses. He had claimed expenses beyond the entitlement as
per the RBI guidelines, and did not refund the excess amount to the bank; (ii)
He had canvassed for procuring a computer business for his sister concern from
the bank by using his position as a statutory auditor; and (iii) He had hired
the services of a C.A. who was not his partner or employee, to conduct audit of
the bank.

The disciplinary body, after examining the evidence produced
by the parties, held that the member was guilty of “other misconduct”. The
council accepted this finding and referred the matter to the High Court to award
punishment to the member by removing his name from the Register of Members for
three months.

The Delhi High Court has held that there is no definition of
the expression “other misconduct” in the C.A. Act. Therefore, the High Court
held that the interpretation of this expression should be left to the council of
ICAI. The council is the disciplinary body comprised of peers who have several
years of experience. Further, the High Court held that in this case, the member
was unable to demonstrate that the above decision of the council and its
recommendation for punishment was either procedurally flawed or that on merits
it was perverse or mala fide. Therefore, the High Court accepted the finding of
the council and ordered that the name of the member be removed from the Register
of Members for a period of three months.

2. Some Ethical Issues

The Ethical Standards Committee of ICAI has clarified some
issues for the benefit of its members on page 1216 of C.A. Journal, February
2010 issue. Some of the issues are listed
below.

(i) If a member is a partner in more than one firm, is it
permissible to print the names of all the firms on visiting cards,
letterheads, stationery, etc.?

A. There is no prohibition under Clause (7) of Part I of
the First Schedule to the C.A. Act.

(ii) Is a Chartered Accountant / Firm permitted to use logo
on letterheads, stationery, etc.?

A. The use of logo/monogram of any kind/form/style/design/colour
whatsoever on any display material or media, e.g., paper stationery,
documents, visiting cards, magnetic devices, internet or signboard by a
Chartered Accountant or a firm of Chartered Accountants is prohibited.
Use/printing of member/firm name in any other manner tantamount to a
logo/monogram is also prohibited. However, a common CA logo has been allowed
to members, provided it is used in the correct manner within the terms of the
council’s guidelines.

(iii) Is the office of a Chartered Accountant permitted to
go in for ISO 9001: 2000 certification or other similar certifications?

A. There is no bar for a member to go in for ISO 9001 :
2000 certification or other similar certifications. However, the member cannot
use the expression like “ISO Certified” on his professional documents,
visiting cards, letterheads or sign boards, etc.

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

A. Under Clause (7) of Part I of the First Schedule to the
CA Act, a member is permitted to print such qualification on his visiting
cards, letterheads and other stationery. However, he cannot use the
designation “Information System Auditor’ or the like.

(v) Can a Chartered Accountant in practice accept audit in
case the audit fee of the previous auditor remains unpaid?

A. In case the undisputed audit fees for carrying out the
statutory audit under the Companies Act, 1956 or various other statutes 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 good office in favour of his predecessor to
have the dispute as regard the fees settled.

The council has taken the view that the provision of audit
fee made in the accounts signed by both the auditor and the auditee shall be
considered as ‘undisputed’ audit fees. In this connection, attention of members
is invited to the Council General Guidelines, 2008, dated 08.08.2008 (also
published on page 686 of the October 2008 issue of C.A . Journal). Under this
notification, a member in practice shall be deemed guilty of professional
misconduct if he accepts the appointment as an auditor of an entity in case the
undisputed audit fee of another Chartered Accountant for carrying out statutory
audit, under the Companies Act, 1956 or various other statutes, has not been
paid.

3. Accounting for foreign
exchange variation prior to commencement of commercial operation

Facts

A company is in the process of setting up a refin-ery in the state of Madhya Pradesh. It is procuring items relating to its plant and machinery for the construction of the refinery from foreign vendors. The transaction is recorded at the rate prevailing on the transaction date. The difference in foreign exchange variation between the transaction date and the settlement date is booked under ‘pre-operative expenditure pending capitalization’, on the ground that the company is yet to commence its commercial operations. No profit and loss account has been prepared by the company and only the necessary details, as per Part II of Schedule VI to the Companies Act, 1956 have been disclosed as ‘pre-operative expenditure pending capitalization’.

Based on the above facts, the company had sought the opinion of the Expert Advisory Committee regarding accounting for foreign exchange differences arising on settlement of liability for procurement of items of plant and machinery from abroad, prior to commencement of operation.

EAC Opinion

The committee noted that Standard AS-11 was notified by the central government under the Companies (Accounting Standards) Rules, 2006 which came into effect in respect of accounting periods commencing on or after December 07, 2006. The notified AS-11 contains a footnote that ‘the accounting treatment of exchange differences contained in this Stan-dard is required to be followed irrespective of the relevant provisions of Schedule VI to the Companies Act,1956’.

On the basis of the above, the committee opined that in respect of transactions in foreign currencies entered into on or after April 01, 2004, but before March 31, 2007, the exchange difference arising on settlement of monetary liability (letter of credit) incurred for procurement of items of plant and ma-chinery from abroad should be adjusted to the cost of the related fixed assets. However, in accordance with AS-11 (revised 2003), the foreign exchange dif-ferences arising on or after April 01,2007 should be charged/credited to the profit and loss account of the period in which the same arise. While applying the above accounting treatment, the requirements of Para 4 (e) (read with its explanation) of AS – 16 “Borrowing Costs” should also be taken into con-sideration. Therefore, the committee is of the view that for this purpose, a profit and loss statement will have to be prepared by the company even during the construction phase. Hence, the foreign exchange differences should not be treated as indi-rect expenses relating to the project and, therefore, not be accumulated as pre-operative expenditure pending capitalization for allocation over the assets of the refinery. [Refer pages 1246 to 1247 of C.A. Journal, February, 2010 issue]

4. Implementation of IFRS in India

The Ministry of Corporate Affairs has issued a press note dated 22.1.2010 in which the roadmap for implementation of IFRS in India has been given as follows:

i) There will be two separate sets of Accounting Standards u/s 211 (3C) of the Companies Act.
The first set would comprise of Indian Ac-counting Standards which are converged with the IFRS’s and which shall be applicable to the specified class of companies. The second set of Accounting Standards will comprise of the existing Indian Accounting Standards and will be applicable to other companies, includ-ing small and medium companies.

ii) The first set of Accounting Standards (i.e., converged accounting standards) will be applied to specified classes of companies in phases as below:

Phase – I : The following categories of companies will convert their opening balance sheets as on the first day of the financial year, commencing on or after 1st April, 2011, in compliance with the notified accounting stan-dards which are converged with IFRS. These companies are: (i) Companies which are part of NSE – Nifty 50; (ii) Companies which are part of BSE – Sensex 30; (iii) Companies whose shares or other securities are listed on stock exchanges outside India; and (iv) Companies, whether listed or not, which have a net worth in excess of Rs.1,000 crores.

Phase – II : Companies, whether listed or not, having a net worth exceeding Rs. 500 crores but not exceeding Rs. 1,000 crores, will convert their opening balance sheet on the first day of the financial year commencing on or after 1st April, 2013, in compliance with the notified accounting standards which are converged with IFRS.

Phase – III : Listed companies which have a net worth of Rs.500 crores or less will convert their opening balance sheet as on the first day of the financial year commencing on or after 1st April, 2014, in compliance with the notified accounting standards which are converged with IFRS.

Companies which fall in the following categories will not be required to follow the notified
accounting standards which are converged with the IFRS (though they may voluntarily opt to do so), but need to follow only the notified accounting standards which are not converged with the IFRS. These companies are:

a) Non-listed companies which have a net worth of Rs. 500 crores or less and whose shares or other securities are not listed on Stock Ex-changes outside India.

b) Small and Medium Companies (SMCs).

iv) Separate roadmaps for banks and insurance companies will be announced at a later date. Necessary amendments in the Companies Act as well as Schedule VI of the Companies Act will be introduced during the next budget session of the Parliament.

5. Accounting and Auditing Standards

The following accounting and auditing standards have been issued by ICAI. The texts of these standards have been published in the February, 2010 issue of the C.A. Journal, on the pages mentioned below. It may be noted that the ‘Standards on Auditing’ will come into force for audit of financial statements for periods beginning on or after 1.4.2011. Other accounting and internal audit standards are recommendatory at present.

(i) Standard on Auditing (SA) 700 (Revised)
– Forming an Opinion and Reporting on Financial Statements (P. 1327 – 1338).

ii) Standard on Auditing (SA) 705 – Modifications to the Opinion in the Independent Auditor’s Report. (P. 1339 – 1348).

iii) Standard on Auditing (SA) 706 (Revised) – Emphasis of Matter Paragraphs and other Matter Paragraphs in the Independent Audi-tor’s Report (P.1349 – 1352).

iv) Standard on Internal Audit (SIA) 17 – Consideration of Laws and Regulations in an Internal Audit (P.1353 – 1357).

v)   Accounting Standard for Local Bodies (ASLB) 5 – Property, Plant and Equipment (P.1358 – 1367).
(vi)   Accounting Standard for Local Bodies (ASLB) 6 – Events after the Reporting Date (P.1368– 1371).

   6. ICAI News

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

iii) CA Final Results

Results of the CA Final Examination, held in No-vember, 2009, were declared in January, 2010. It has been reported that the performance of students in the final examination has been very poor as compared to last four examinations. ICAI will have to study the reasons for this fall in the performance of students and take remedial steps to improve the position. The figures, as reported, are as hereunder:

i) CA T.N. Manoharan awarded PADMA SHRI
CA T.N. Manoharan, President of ICAI, 2006– 07, has been awarded the title of ‘PADMA SHRI’ by the President of India. It is a great honour and recognition for our profession. Shri Manoharan is from the BCAS family and a regular faculty member in most of BCAS’s programmes. Our greetings and best wishes to him on his achievement!

ii) Branches of ICAI

a) A new branch has been opened on 16.12.2009 at Gandhidham (WIRC). Further, branches will be opened at Ratlam, Pali, Ganganagar, Bhavnagar and Tirupati (Refer P. 1205 and 1310).

b) New branch buildings (ICAI Bhavans) in-augurated at Vapi on 1.12.2009, Baroda on 13.12.2009, Ranchi on 15.12.2009, Guwahati on 18.12.2009, Vijaywada on 25.1.2010, Belgaum on 26.1.2010, Hubli on 26.1.2010, Pune on 26.1.2010, and Nashik on 27.1.2010. (Refer P. 1210).

iv) Signature on Audit Reports

ICAI has decided that members should include the Registration No. of the firm, as allotted by ICAI in the audit reports and signed by them, in addition to other requirements relating to the signature on the audit report as prescribed under the relevant standard on auditing. Further, the auditor should ensure that the resolution passed by the company for appointment of the statutory auditor u/s 224 of the Companies Act, contains the Registration No. of the C.A. Firm. These requirements will come into effect from 1.4.2010 (P. 1312).

v) Submission of Form112 by students for taking other courses

As a measure of amnesty, ICAI has decided that students who have not filed Form No.112 so far, can file the same on or before 31.3.2010. No request for condonation of delay in submitting Form No. 112 will be considered after 1.4.2010. (P. 1312)

vi) Results of Elections to Central and Regional Councils

Details of members elected to the Central and Regional Councils for three years from February 2010 – 2013 have been published on P. 1314 – 1316.

vii) New Office Bearers of WIRC

The following members have been elected as of-fice bearers of WIRC for one year from February 2010.

(a) Shri Sanjeev Lalan, Mumbai – Chairman

(b) Shri Makrand Joshi, Nagpur – Vice Chairman

c) Shri Mangesh Kinare, Mumbai – Secretary

d) Shri Parag Rawal, Ahmedabad – Treasurer

Our greetings and best wishes to them for a successful term of office!

viii) Our New President and Vice President

At the election held on 12.2.2010, the council has elected:

Shri Amarjeet Chopra, New Delhi as our New President; and
Shri G. Ramaswamy as our New Vice President

We convey our greetings and best wishes for their successful terms in office. We hope they will be able to provide better leadership to our profession during the year.

ICAI And Its Members

ICAI and Its Members

1. Disciplinary case :

In the case of ICAI v. Shri Raj Kumar N. Iyer, the
member had given tax audit report u/s.44AB of the Income-tax Act to his client.
The said audit report was not accompanied by the Balance Sheet, and Profit &
Loss Account as annexure to Form 3CD. During the course of
a survey u/s.133A, a few days after the said report was filed with the AO, it
was found that the assessee had no books of accounts. When the statement of the
member was recorded by the AO, he admitted that the assessee did not maintain
proper books of account as mentioned in the tax audit report. The member also
stated that no books of accounts were generated through the computer and,
therefore, he stated that (i) it was not possible to furnish Trading and Profit
& Loss Account and Balance Sheet, (ii) the opinion given in Form 3CB that the
accounts give true and fair view of the financial statements was not correct,
and (iii) the audit report should be treated as incorrect.

On these facts, the Assessing Officer complained to the
Institute that the member had given a false audit certificate in Form 3CB and
3CD and, therefore, he was guilty of professional and/or other misconduct.

In the disciplinary proceedings, the member pleaded guilty
under Regulation 15(2) of the C.A. Regulations. Therefore, he was held to be
guilty of professional misconduct under Clause (8) of Part I of the Second
Schedule. The Council referred the matter to Bombay High Court with a
recommendation to reprimand the member.

At the time of hearing, the member did not attend before the
High Court. However, the High Court has taken the view that since the member has
admitted the guilt, he deserves a lenient punishment. On this basis the High
Court accepted the recommendation of the Council and ordered that the member be
reprimanded. (C.A. Journal for February, 2009 — Page 1377).

2. New office bearers of the Council :

The Council of ICAI has elected new office bearers for
2009-10 on 5-2-2009. 4 Standing Committees and 36 Non-standing Committees are
also elected as under :

(i) Shri Uttam Prakash Agarwal from Mumbai is elected as
President. Our greetings and best wishes to him for a successful term of
office.

(ii) Shri Amarjit Chopra from New Delhi is elected as
Vice-President. Our greetings and best wishes to him for a successful term of
office.

(iii) Executive Committee — President, Vice-President, C.A.
V. C. James, Abhijit Bundopadhyay, K. P. Khandelwal and V. K. Garg.

(iv) Examination Committee — President, Vice-President,
C.A. R. S. Adukia, Preeti P. Mahatme, J. Venkateswarlu, Manoj Fadnis and Shri
K. R. Maheshwari.

(v) Disciplinary Committee (Old Cases) — President,
Vice-President, C.A. G. Ramaswamy, K. K. Gupta and Shri O. P. Vaish.

(vi) Disciplinary Committee (New Cases) — President, C.A.
S. Santhanakrishnan, Anuj Goyal, Shri R. K. Handoo and Shri M. P. Lohia.

(vii) Board of Discipline (New Cases) — President, C.A. K.
P. Khandelwal and Shri S. K. Nayak.

(viii) Chairmen of some of the Other Committees :

3. The Companies Bill, 2008 :

The Companies Bill, 2008 has been introduced in the Lok Sabha
on 23-10-2008 to replace the existing Companies Act, 1956. There is no proposal
about rotation of statutory auditors in the Bill. However, some of the
provisions are proposed to ensure that the independence of statutory auditors is
not impaired. In brief, these provisions are as under :

Special Resolution will be required if an auditor, other than the retiring auditor, is proposed to be appointed.

An auditor who has direct financial interest in the company or who receives any loans or guarantee from the company or who has any business relationship (other than as an auditor) with the company cannot be appointed as auditor.

A person whose relative is in employment of the company as a director or key managerial personnel cannot be appointed as auditor.

If a firm is appointed as auditors, only a partner of the firm, as authorised by the firm, can sign the audit report on behalf of the firm.

An auditor cannot accept any other assignment from the company like accounting, book keeping, internal audit, design and implementation of any financial information system, actuarial services, investment advisory services, investment banking services, financial services and management services.

Audit report shall state whether the financial statements comply with the accounting standards and auditing standards. It may be noted that the National Advisory Committee appointed by the Government will now be required to advise the Government about accounting standards as well as auditing standards. In other words, the auditors will have to comply with auditing standards laid down by the Government on the advice of the National Advisory Committee.

Auditor shall have a right to attend every annual general meeting and shall have a right to be heard at such meeting on any part of the business conducted at the meeting.

If the auditor makes default in complying with the provisions relating to reporting on the financial statements, provisions prohibiting rendering of other services, and allowing any person other than an authorised person to sign audit report, he shall be liable to pay fine of Rs.25,000, which may extend to Rs.5 lacs. If it is found that the auditor has knowingly or willfully contravened any of the above provisions, he shall be punishable with imprisonment for a term up to one year or with fine of Rs.1 lac, which may extend to Rs.25 lacs or with both. It is also provided that in such cases, the auditor will have to refund the fees and also pay for damages to the company or to any other persons for loss arising out of incorrect or misleading statements of particulars made in the audit report.

From the above provisions proposed in the Companies Bill, 2008, it will be noticed that these provisions are more stringent and are being introduced with a view to achieve the goal to strengthen the independence of statutory auditors and improve quality of audit. It appears that the Government is keen to ensure that the independence of statutory auditors is not affected by any weakness in the corporate governance.

4. Accountancy Museum:

ICAI – Accountancy Museum was opened at ICAI Bhavan, Noida, on 2-2-2009. The museum presents rare and historic images (evidence of the oldest balance sheet in human civilisation) and documentary evidence of the evolution of accountancy in India. The items on display include the minutes of Indian Accountancy Board (responsible for the birth of the Institute), first gold medals of R.A. final and CA final examinations, first annual report of the Council, our own first balance sheet, rare photographs and so on. It presents very unique images including documents that have been acquired from the British Museum, London, and other private collectors from India as well as abroad. This museum will serve as a great source of learning, inspiration and professional pride for all of us.

5. Results of CA. Examinations:

i) CPT (December, 2008) – out of 89,253 (including 11,588 girls) students who appeared, 34,251 (38.3%) passed CPT examination.

ii) Final (November, 2008) – Both Groups – Out of 14,606 students who appeared, 2,961 (20.27%) passed.

Group I – out of 6,588 students who appeared, 1,235 (18.76%) passed.

Group II – out of 9,235 students who appeared, 1,952 (21.13%) passed.

6. MoU with CPA Australia:

ICAI has signed MoU with CPA Australia. As per the MoD reached, members of ICAI who are graduates will be eligible for CPA Australia membership on passing one paper on Business Strategy & Leadership. On the other hand, members of CPA Australia will be eligible for ICAI membership, subject to passing two papers on Corporate and Allied Laws and Taxation and two more papers on Advanced Auditing and Professional Ethics and Financial Reporting, if they have not already passed them as part of the CPA Australia programme.

This MoU will open professional opportunities to our members in Australia and this will bring the two countries, India and Australia, closer.

7. Auditing Standards:

The following Auditing Standards are issued and published in C.A. Journal for February, 2009 on pages stated below:

i) Standard on International Audit (SIA) 12

Internal Control Evaluation (Page 1444-1448)

ii) Standard on Internal Audit (SIA) 13

Enterprise Risk Management (Page 1449-1450)

iii) Revised Standard on Auditing (SA) 530

Audit Sampling (Page 1451-1456)

iv) Revised Standard on Auditing (SA) 540

Auditing Accounting Estimates, including Fair Value Accounting Estimates and Related Party Disclosures.

8. ICAI News:

(Note: Page Nos. given below are from CA. Journal for February, 2009)

i) Enhancing Audit Quality:

Some observations made by the Financial Reporting Review Board are listed on Page 1417 in order to enable members to improve the quality of audit of corporate bodies. These observations relate to presentation under various heads in Balance Sheet and Profit & Loss AI c. as required under Parts I and 11 of Schedule VI of the Companies Act.

(ii) Certificate Course on Enterprise Risk Management:
The Internal Audit Standards Board of ICAI has launched the above course for our members. The duration of this course is 200 hours spread over 6 weekends. Details are given on Page 1431.

iii) ICAI publications:

a) Manual on Concurrent Audit of Banks.

b) Technical Guide on Review and Certification of Investment Risk Management Systems and Process of Insurance Companies.

c) Guide to Implementing Enterprise Risk Management.

ICAI And Its Members

ICAI and Its Members

1. ICAI News :

(Note : Page Nos. given below are from C.A. Journal
for May, 2010)

(i) Multipurpose Empanelment Application Form (MEF) for the
year 2010-11 for empanelment for audit assignments has been hosted on
www.meficai.org on 1-5-2010. Last date for submission of MEF is 15-6-2010. Hard
copy of the declaration is to be sent to ICAI, New Delhi before 30-6-2010. Out
of the total applications up to 10% applicants will be called upon to submit (a)
Financial Statements of the Firm, (b) Partnership Deed effective on 1-1-2010,
and (c) copies of acknowledgement of latest Income-tax Returns, computation of
income and the latest assessment orders of the Firm and Partners. (Page 1736).

(ii) SEBI has issued a Circular on 5-4-2010 whereby the
listing agreements of all listed companies are amended. Some of the new
requirements, concerning auditors, as per the Circular are as under :

(a) Auditors of the company will have to give certificate
for accounting treatment under schemes of arrangement on account of
amalgamation/merger/reconstruction, etc. of listed companies to be submitted
to the concerned stock exchange. The auditors will be required to issue a
certificate to the effect that the accounting treatment contained in such
schemes is in compliance with all the applicable accounting standards.

(b) In relation to the requirement of a valid peer review
certificate for statutory auditors, in respect of all listed entities, limited
review/statutory audit reports submitted to the concerned stock exchanges
shall be given only by those auditors who have subjected themselves to the
peer review process of the ICAI and who hold a valid certificate issued by the
‘Peer Review Board’ of the ICAI.

(c) Limited review report and statutory auditor’s reports
are modified to make it clear that disclosures pertaining to details of public
shareholding and promoters’ shareholding, including details of
pledged/encumbered shares of promoters/promoter group, contained in the format
have been traced from disclosures made by the management; and

(d) In order to ensure that the CFO has adequate accounting
and financial management expertise to review and rectify the financial
statements as required under Clause 49 of the Listing Agreement, the
appointment of the CFO is approved by the Audit Committee before finalisation
of the same by the management and the Audit Committee, while approving the
appointment, shall assess the qualifications, experience and background, etc.
of the candidate. (Pages 1753-54)

(iv) Special Placement Programme for experienced CAs :

Special Placement Programme for experienced and fresh
Chartered Accountants has been organised by ICAI in the month of June, 2010 as
under :

Centre	Dates
(a) Mumbai and New Delhi	25-26 June, 2010
(b) Bangalore, Chennai, Kolkata and Hyderabad	23-24 June, 2010
(c) Jaipur and Pune	22 June, 2010

CAs who have qualified before 10-5-2010 as well as those who
have experience of more than one year can participate in this programme. (Page
1862)

(v) Campus Placement Programme :

In the last issue of BCA Journal (Page 124) results of the
First Phase of the campus placement programme organised by ICAI in Feb-Mar, 2010
were given. Now results of the Second Phase of this programme are published. The
highlights of this phase are as under :

(a) Brief summary for both phases of the programme :

No. of candidates registered — 2931

No. of interview teams — 99

No. of organisations — 94

No. of jobs offered — 1411

% of jobs offered — 48.11%

(b) Phase II — Important Centres :

Centres	Candidates registered	No. of interview teams	No. of jobs offered
Ahmedabad	158	8	29
Chandigarh	337	5	24
Hyderabad	201	19	106
Jaipur	370	9	51

Note?: Annual salary offered — Highest (international) $ 1.5 lacs (about Rs.70 lacs), Highest (Indian) Rs.10.82 lacs, Minimum Rs.3.24 lacs and Average Rs.6.58 lacs. (Page 1870)

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)

ICAI And Its Members

1. Disciplinary Case

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

ICAI has prepared action plan to check the system of dummy articles hip which appears to be prevalent in the profession. The following Notification dated 27.3.2009 is published on page 1983 of CA. Journal for May, 2009.

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).

ICAI And Its Members

ICAI and Its Members

1. ICAI News :

(Note : Page Nos. given below are from C.A. Journal
for June, 2010)

(i) A New Grievance Resolution Mechanism (e-sahaayataa)
:

‘e-sahaayataa’ is the only e-channel for the entire base of
members and students of the Institute and other stakeholders of the profession,
wherein all their queries/complaints/grievances pertaining to the day-to-day
working shall be catered to and be resolved in a time-bound and transparent
manner. This service is available on ICAI website (htpp://www.icai.org/help).

Objectives :

To provide timely
services to all the stakeholders of the profession throughout the globe.
To resolve the
query/complaint/grievance within 3-7 days from the date of submission of the
same.
To eliminate the
operational bottlenecks and smoothen the flow of the education process of
Chartered Accountancy.

Key statistics :

Total
queries/complaints/grievances submitted till May 20,2010 1742

Total
queries/complaints/grievances resolved till May 26, 2010 1689

Total
queries/complaints/grievances under the process 53

Scope :

‘e-Sahaayataa’ caters only to the
queries/complaints/grievances pertaining to the day-to-day working of the
Institute which are general in nature. This facility is not meant for
registering or making allegations, personal observations and personal comments.
(Page 1918)

(ii) Implementation of S. 51A of Unlawful Activities
(Prevention) Act, 1967 :

ICAI has issued the following announcement on Page 2046.

The provisions of the Unlawful Activities (Prevention) Act,
1967 were amended in 2008, by inserting S. 51A which was notified on 31-12-2008
by the Government of India. S. 51A reads as under :

“51A. For the prevention of, and for coping with terrorist
activities, the Central Government shall have power to :

(a) freeze, seize or attach funds and other financial
assets or economic resources held by, on behalf of or at the direction of the
individuals or entities listed in the Schedule to the Order, or any other
person engaged in or suspected to be engaged in terrorism;

(b) prohibit any individual or entity from making any
funds, financial assets or economic resources or related services available
for the benefit of the individuals or entities listed in the Schedule to the
Order or any person engaged in or suspected to be engaged in terrorism; and

(c) prevent the entry into or the transit through India of
individuals listed in the Schedule to the Order or any person engaged in or
suspected to be engaged in terrorism.”

In order to implement the provisions of S. 51A effectively,
the Ministry of Home Affairs, Govt. of India requested the Ministry of Corporate
Affairs to issue an appropriate order to ICAI, ICSI and ICWAI to sensitise their
members to the provisions of S. 51A of the Unlawful Activities (Prevention) Act,
1967. Accordingly the Ministry of Corporate Affairs vide its letter dated
22-3-2010 asked the ICAI to advise its members to act as per mandate of the
Ministry of Home Affairs.

Accordingly, all members of ICAI are informed that as and
when any member comes across any such fact which is connected with the
violation(s) of provision(s) of the Unlawful Activities (Prevention) Act, 1967,
he must take action forthwith for the implementation of S. 51A as per procedure
laid down in the Office Memorandum dated 22-2-2010 issued by the Ministry of
Home Affairs, Government of India.

In other words, the members of ICAI must ensure that in case
any of their client match with the particulars of designated individual/entity,
as per Order dated 8-7-2009, wherein the list of such designated
individual/entities have been given, they shall immediately, not later than 24
hours from the time of finding out such client, inform full particulars to the
Joint Secretary (IS.I), Ministry of Home Affairs, at Fax No. 011-23092569 and
also convey over telephone on 011-23092736. The particulars apart from being
sent by post should also be conveyed on e-mail id:isis@nic.in.

(iii) ICAI publications :

The following Technical Guides are issued by ICAI :

(a) Technical Guide on Internal Audit of Construction
Industry

(b) Technical Guide on Internal Audit of Educational
Institutions

(c) Technical Guide on Accounting for Development
activities of SEZs. (Pages 2048-2049)

2. Accounting Standards :

The Accounting Standards Board has issued further exposure drafts revising the following Accounting Standards and also issued exposure drafts of New Accounting Standards after convergence with the IFRS/IAS for public comments :

   i) Revised Standards :

   a) AS-22Income Taxes(corresponding to IAS-12)
   b) AS-24Non-Current Assets held for Sale and Discounted Operations (corresponding to IFRS-5)
   c) AS-27Interests in Joint Ventures(corresponding to IAS-31)
   d) AS-28 Impairment of Assets(corresponding to IAS-36)

   ii) New Standards :

   a) AS-33 Share-based Payment (corresponding to IFRS-2)

   b) AS-36 Accounting and Reporting by Retirement Benefit Plans (corresponding to IAS-26)

   3. Capitalisation of expenditures in re-spect of projects under construction (EAC Opinion) (Pages 1937-1938) :

Facts :

A government company is engaged in the construction and operation of thermal power plants in the country. The company has also diversified into hydro-power generation, coal mining and oil & gas exploration, etc. The company is an electricity generation company and is governed by the provisions of the Electricity Act, 2003. The company prepares its annual financial statements as per the provisions of t h e Companies Act.

The company has three-tier organisation structure consisting of projects/stations, regional headquarters and corporate office. The company is undertaking constructions of a number of new power projects at the greenfield sites as well as expansion of existing projects. Some of the key activities related to the construction projects, such as design & engineering, award of major contracts, post-award contract management, project monitoring, etc. are performed centrally at the corporate office. The expenditure of engineering, contracting, project monitoring, hydro region head-quarters, coal mining and finance concurrence departments were considered as expenditure during construction and allocated through the project under construction/expansion on systematic basis i.e., capital expenditure incurred during the year at these projects. Expenses of other departments providing common services were charged to the statement of profit and loss. Further, administration and general overhead expenses attributable to construction of fixed assets incurred till they were ready for their intended use were identified and allocated on a systematic basis to the cost of related assets. However, the government auditor observed that administration and other general overhead expenses were usually excluded from the cost of fixed assets since they did not relate to a specific fixed assets, while the company has allocated expenses relating to the divisions on the ground that they perform functions relating to construction only. Hence according to Auditors the allocation of expenses was not in accordance with AS-10.

Query :

On these facts, the company has sough the opinion of the Expert Advisory Committee (EAC) as to whether allocation and capitalisation of expenses related to the identified departments of corporate office and the regional headquarters which were engaged in project engineering, designing, contract management and project monitoring activities, etc. to/at the project under construction/expansion was correct.

EAC Opinion :

After considering paragraphs 9.1, 9.2 and 10.1 of AS-10 the Committee observed that the basic principle to be applied while capitalising an item of cost to a fixed asset/project under construction/ expansion is that it should be directly attributable to the construction of the project/fixed assets for brining it to its working condition for its intended use. The costs that are directly attributable to the construction/acquisition of a fixed asset/project for bringing it to its working condition are those costs that would have been avoided if the construction/acquisition had not been made. These are the expenditures without the incurrence of which, the construction of project/asset could not have taken place and the project/asset could not be brought to its working condition, such as site preparation costs, installation costs, salaries of engineers engaged the construction activities, etc. The avoidance of costs has the basis of identifying directly attributable cost for the purpose of capitalisation is also supported by Accounting Standard (AS ) 16, ‘Borrowing Costs’. In the present case, the Committee is of the view that it should be seen that whether the expenses incurred on the activities of the various departments are directly attributable to the construction as discussed above. Accordingly, if expenses incurred at various departments are directly attributable to construction, these can be capitalised with the cost of concerned fixed asset(s)/project(s).

In view of the above, the capitalisation of expenses related to various departments of corporate office and the regional headquarters to the projects/assets under construction/expansion would be correct provided the expenses incurred on the activities of these departments can be considered to be directly attributable to the constriction of project(s)/fixed asset(s) for bringing them to their working condition as discussed above.

[Refer pages 1937 to 1940 of C.A. Journal]

ICAI And Its Members

1. Disciplinary case :

In the case of ICAI vs. Shri A. L. Ghael (C.A. Journal — June, 2009, P. 2054-55) CIT Gujarat had filed a complaint against the member. In this complaint it was alleged that during the search carried out u/s.132 of the Income-tax Act, at the premises of the member, the Department found as under :

(i) 15 bogus certificates purported to have been issued by a bank to the effect that the bank was maintaining a non-resident external savings bank account. These were bogus bank certificates of gifts from NRE account.

(ii) 13 bank acknowledgements of Income-tax returns affixed with the seal of ITO and receipts under the seal of the Department.

The disciplinary committee, after examining the evidence brought on record, held that the member acted contrary to the conduct befitting a Chartered Accountant and committed ‘other misconduct’ for which he was liable u/s.22 read with S. 21 of C.A. Act. The Council of ICAI accepted the report of the disciplinary committee and recommended to the High Court that the name of the member be removed from the Register of Members for a period of 6 months.

The Gujarat High Court has taken a serious view of the conduct of the member. It has observed that so far as bogus certificates of the bank with regard to NRE account were concerned, it was clear that even after knowing the fact that the certificates were bogus, the member did not give copies to the Bank Manager for further investigation. This indicated the guilty mind behind the conduct of the member. As regards the blank acknowledgements and receipts under the seal of Income-tax Department, it was observed that the intention of the member was bad and illegal. Such conduct would not only result into loss of revenue but would also be a fraud on the public. On overall consideration of the matter, the court has confirmed the finding of the council of ICAI and held that the name of the member be removed from the Register of Members for a period of six months.

2. Auditing Standards :

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

The following Exposure Drafts are issued by ICAI. Members can submit their comments by 31-7-2009.

(i) Standard on Review Engagements (SRE) — 2400 (Revised) — ‘Engagements to Review Financial Statements’. (Pages 2154-2161)

(ii) Standard on Auditing (SA) — 700 (Revised) — ‘Forming an Opinion and Reporting on Financial Statements’. (Pages 2162-2176)

(iii) Standard on Auditing (SA) — 705 — ‘Modification to the Opinion in the Independent Auditors’ Report’. (Pages 2177-2188)

(iv) Standard on Auditing (SA) — 706 — ‘Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditors’ Report’. (Pages 2189-2193)

3. EAC opinion :

The Expert Advisory Committee of ICAI (EAC) has given an opinion for accounting for maintenance spares supplied free of cost along with the main equipment in the case of a public sector undertaking. One of the usual terms of the sale of the equipment by the company is that the price of the equipment includes certain specified quantity of maintenance spares supplied free of cost. In other words, the company agrees to supply certain spares free of cost i.e., without charging anything in excess of the agreed price of the equipment. However, while recording such sales, the company credits the sales account with the gross value of the equipment plus value of spares to be supplied free of cost and debits the account of the customer. Thereafter, the company debits the sales account with the value of the spares supplied free of cost and gives credit to the account of the customer. The question for consideration was whether the above accounting entry was in compliance with Accounting Standard (AS-9) dealing with ‘Revenue Recognition’.

The Committee has given the opinion that the accounting for sale of equipment duly reducing the value of free supply of spares would be in line with AS-9 provided significant risks and rewards of the ownership in respect of free spares are transferred at the time of the delivery of spares to the buyer. However, according to EAC, separate entries should be passed for (a) booking recognition of revenue from sale of equipment net of the amount related to revenue from spares when the risk and rewards of ownership of the equipment are transferred and (b) booking recognition of revenue from spares when the risks and rewards of ownership of spares are transferred. (Refer pages 2059-2061 of C.A. Journal for June, 2009)

4. Enhancing Audit Quality :

Financial Reporting Review Board (FRRB) reviews the General Purpose Financial Statements of certain enterprises and auditors’ reports thereon. Observations on major non-compliances in the following matters noted by FRRB are stated on page 2130 of C.A. Journal for June, 2009 :

(i) Disclosure of Accounting Policies (AS-1)

(ii) Valuation of Inventories (AS-2)

(iii) Revenue Recognition (AS-9)

(iv) Accounting for Investments (AS-13)

(v) Leases (AS-19).

5. Women Steering Group :

The World celebrated International Women’s Day on 8th March 2009. ICAI has constituted a Women Steering Group (WSG). The Mission statement of WSG states as under :

“The Women Steering Group of the Institute of Chartered Accountant of India (WSG of the ICAI) is a wing of ICAI, which is dedicated to serving women Chartered Accountants and female stu-dents aspiring to be the members of the ICAL The WSG will provide a supportive environment and valuable resources for female members and students to achieve their personal and professional goals. through various opportunities including leadership, networking and education.”

To accomplish this mission, WSG offers in-depth support in four important areas:

1. Increase Professional and Public Awareness about the Indian Women Chartered Accoun-tants.

2. Facilitate a national network of individuals and organisations to encourage networking and mentoring of women members.

3. Provide opportunities for professional growth.

4. Advocate professional parity.

It is stated that out of about 1,50,000 CAs. in our country, about 15% (22,500) are women. Out of about 4,50,000 CA. students, about 40% (1,80,000) are girl students. (Details about activities of WSG are published on pages 2132-2133 of CA. Journal for June, 2009).

6. ICAI News:

(Note: Page Nos. stated below are from CA. Jour-nal for June, 2009)

i) Transfer of Articles:

Announcement of the Council of ICAI dated 27-3-2009 about transfer of articles of Articled Assistants has been published in BCA Journal of June, 2009. This has now been published in CA. Journal for June, 2009 at page 2134.

(ii) Requirement of CPE credit:

Now members can view / check their CPE credit hours (Calendar yearwise) on the site www.cpeicai.org.maintained internally by the EDP Section, at the member login (not POU Login) for which they need to insert six (6) digit membership number [add zero (0), if required] and password would be that (6)-digit membership number pre-fixed with the letters (cpe). (Refer details on page 2136)

iii) Working hours of Articled Assistants

On page 240 of BCA Journal for May, 2009, summary of the announcement relating to Working Hours of Articled Assistants is published. Details are now available on pages 2137-38 of CA. Journal for June, 2009.

iv) ERP Courses:

ICAI is offering ERP Courses for members and students (Final / Articles completed) of the Institute to enable them to offer value-added services in the field of ERP consulting as functional consultants in the finance domain. Details are on page 2146.

v) Your Inspiring Success Stories:

On page 2142 there is an inspiring announcement by the Editorial Board on CA. Journal which reads as under:

“As part of multi-pronged activities to mark the ICAI Diamond Jubilee year, the Editorial Board has decided to publish extra-ordinary success sto-ries of Chartered Accountants in various walks of professional life in the Institute’s Journal, ‘The Chartered Accountant’. Do you think there is something remarkable about your achievements in professional life that the others should know? If yes, write down that glorious story and send it to us. You may ask yourself: What did I do to create my professional success? What inspired me in this mission? How did I not deviate despite the presence of blockages and distractions in my way? How did I overcome my weaknesses and work on my strength? How my achievements helped the organisation/other professionals/society at large? and Finally, how my CA qualification laid the foundation of my success?

The object of the write-up should be to motivate all our students, members, other readers as well as those who wish to join chartered accountant fraternity.”

vi) Professional Development Portal:

Professional Development Committee has enhanced and upgraded P.O. Portal with a view to provide timely and necessary information on practice development and professional opportunities to members. (Refer page 2139 for details)

ICAI And Its Members

ICAI and its Members

1.
Companies Bill, 2009 — New avenues for
Chartered Accountants :

As reported in the last
issue, the above Bill is pending before the Parliament. The Standing Committee
for Finance has submitted its report on 9-9-2009. Several suggestions have been
made by this Committee and the Bill is likely to be modified on this basis and
discussed in the Parliament during the months of February to May, 2011. Some
important changes relating to accounts and audit were discussed in the last
issue of BCA Journal. Some of the other amendments affecting Chartered
Accountants suggested in the Bill are as under.

(i) Clause 422(1) of the
Bill provides that no association or partnership consisting of more than such
number, not exceeding 100, as may be prescribed by Rules, shall be formed for
the purpose of carrying on any business unless it is registered as a company. It
may be noted that under clause 422(2)(b) it is provided that the above
restriction shall not apply to a partnership formed by professionals. Therefore,
Chartered Accountants and other professionals will be able to form a partnership
firm with unlimited number of partners.

(ii) Clauses 368 to 395 of
the Bill provide for the constitution of ‘National Company Law Tribunal’ and
‘National Company Law Appellate Tribunal’ and the functions and procedure to be
followed by these two bodies. Under the scheme of the Bill, existing powers of
the High Courts under the Companies Act will now vest in the Tribunal. Each
Bench of the Tribunal or Appellate Tribunal will consist of two categories of
members. One will be a judicial member and the other a technical member.
President of the Tribunal shall be a sitting or retired Judge of a High Court.
The chairperson of the Appellate Tribunal shall be a sitting or retired Judge of
the Supreme Court or Chief Justice of a High Court. In the list of persons who
can be a technical members of the Tribunal or the Appellate Tribunal it is
provided that a Chartered Accountant in practice for 15 years or more can be
appointed as a technical member of the Tribunal or the Appellate Tribunal.

(iii) Clause 393 of the Bill
also provides that a Chartered Accountant in practice can appear before the
Tribunal or the Appellate Tribunal and argue the case of his client.

(iv) Clause 250 of the Bill
provides that the Central Government shall maintain a panel consisting of names
of Chartered Accountants, Advocates, Company Secretaries, etc. for appointment
as Company Liquidators or Provisional Liquidators. For the purpose of winding up
of a company by the Tribunal, a Company Liquidator who is on the above panel
will have to be appointed. This provision will enable Chartered Accountants in
practice to work as Company Liquidators.

From the above provisions it
will be noted that if the Companies Bill, 2009 is enacted with the above
clauses, our members will be able to render their professional services in the
above new fields.

2.
Accounting treatment of overlift/underlift
quantity of crude oil :

Facts :

A public limited company
(Company) which is a wholly-owned subsidiary of a listed government company, is
in the business of exploration and production of oil and gas and other
hydrocarbon-related activities outside India. Usually, the legal regimes
applicable in most of the counties provide that the ownership of mineral
resources (hydrocarbons) is with respective governments. Accordingly, the host
governments grant the rights to explore, develop and produce hydrocarbons in
certain specified geographical areas within their territories (Rights) to the
companies on some equitable consideration under various regimes. The activities
of the Company, thus, include securing such Rights and then to explore, develop
and produce hydrocarbons. Such Rights are secured either on a 100% basis,
wherein the Company or its affiliates themselves take the entire risks and
rewards of such Rights or in consortium with other participants where the joint
venture participants share the risks and rewards in certain agreed proportions.

The Company is a participant
in a production sharing agreement along with other companies (Consortium) and
the government of a foreign country (State) in respect of certain geographical
area.

The Company is accounting
for the overlift/underlift quantity of its basic entitlement as per its declared
accounting policy. Following the accounting policy, the Company reduced the
sales arrived at by multiplying overlift quantity by the sale price of crude oil
realised by the Company for its last sold cargo during March 2009 and created
liability for the same. In case of underlift as on the balance sheet date, the
Company would have treated the underlift quantity as inventory of the Company
and would have valued it in accordance with the requirements of Accounting
Standard (AS) 2, ‘Valuation of Inventories’ at cost or net realisable value,
whichever is lower.

However, C&AG auditors while
carrying out their review for the financial year 2008-09 objected to the
accounting for overlift quantity as liability and contended that the Company
should treat overlift quantity as its own share of production and should have
booked sales for the overlift quantity simultaneously recognising expenditure on
the basis of its recent cost figures.

Query :

Hence, the Company sought
the opinion of the Expert Advisor Committee of ICAI on the appropriate
accounting treatment of overlift/underlift quantity of crude oil by the Company,
i.e., whether the accounting policy of the Company in recognising
overlift quantity as liability and underlift quantity as inventory is
appropriate and whether the accounting treatment carried out by the Company in
respect of overlift quantity of crude oil by recognising the same as liability
at recent sales price of the crude oil realised by the Company is appropriate ?

Opinion :

After considering the term ‘revenue’ as provided by Accounting Standard (AS) 9, ‘Revenue Recogni-tion’, the Committee expressed the view that the total amount of consideration arising from the sale of crude oil should be recognised as revenue.

Further, after considering paragraph 10 of Accounting Standard (AS) 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, the Committee has taken the view that the overlift of crude oil gives rise to an obligation on the Company to transfer future economic benefits. Accordingly, a liability should be provided for by the Company by way of charge to the profit and loss account for overlift quantity.

Furthermore, the amount of provision for the liability in respect of overlift quantity should be determined on the basis of the best estimate of the expenditure required to settle the present obligation at the balance sheet date as per the requirements of paragraph 35 of AS-29.

As regards underlift situation, the Committee has taken the view that to the extent it is the settlement of an overlift situation of the earlier periods, it should be recognised by debiting the liability provided for under the overlift situation and crediting/reducing the Company’s proportion-ate share in the production cost. In respect of other underlift situations, the Committee has noted that the Framework for the Preparation and Pre-sentation of Financial Statements, issued by ICAI provides that “an asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to an enterprise”. Accordingly, the Committee expressed the view that an underlift represents a right to future economic benefit through entitlement to receive equivalent production in the future and is therefore, an asset.

Since in the present case, the Company is charged for the proportionate share of production cost as per its basic entitlement, but the quantity of crude oil lifted is less than its basis entitlement, the amount paid in excess is ‘prepaid expense’. The Committee has taken the view that under the underlift situation, the Company should recognise a pre-paid expense by crediting its proportionate share of production cost as per the joint operating agreement/production sharing agreement.

On the basis of the above, the Committee expressed the opinion that the accounting policy of the Company in recognising overlift quantity as liability is appropriate, however, recognition of liability by reversing the sales/revenue of the Company at the recent sales price of the crude oil is not appropriate. The accounting policy of recognising the underlift quantity as inventory is
also not appropriate.

3. 300th Meeting of Council of ICAI held on 24-11-2010:

Some of the important decisions taken by the Council at the above meeting are as under:
(i) Formulation of guidelines for revival of derecognised Study Circles: A Study Circle which was earlier derecognised by the Council can be revived by the Continuing Professional Education Committee, subject to the compliance with certain norms to be specified in this regard.

(ii) Recognition of fair value changes in investment property: The ASB has decided that instead of recognising the changes in fair value in investment property in profit or loss, where an entity adopts the option of measuring investment property at fair value as per the draft AS-37 dealing with ‘Investment Property’, the same should be recognised in other comprehensive income.

(iii) To ensure professional competence of our members: The Council decided that where there has been a gap of 5 or more years between the removal of name and application of restoration of the name, if the member applies for Certificate of Practice, he should undergo a specified refresher course of a duration of 30 hours in the modules to be developed by Board of Studies, either in physical form during weekends or in the online format. Alternatively, such members could attend CPE programmes and earn 30 CPE hours before the Certificate of Practice is restored/granted.

(iv) Persons who have not enrolled as members: For the persons who have passed the final examination and become eligible for enrolment as a member, but have not applied for membership within 5 years from the date of their becoming eligible, should undergo the aforesaid refresher course for getting enrolled as a member.

(v) Modalities to be recommended for holding the office of Office Bearers: For the year 2011-12 and 2012-13 for those branches where the majority of members of Managing Committee have held that office of Chairman in earlier years, the Council observed that holding of post of Chairman of a branch again is not acceptable either from good governance point of view or from ethical point of view. Therefore, the Council has decided that the Chairman of a branch after demitting office should not seek re-election for or hold the post of the Chairman of the said branch in the year 2010-11 and 2012-13.

(vi) Common Proficiency Test: It is decided that candidate shall have to obtain at one sitting, a minimum of 30% marks (out of maximum marks specified by the Council for each Section) and a minimum of 50% marks in the aggregate of all the Sections, subject to the principle of negative marking, in a manner as may be specified by the Council from time to time.

(vii) Revised Final Study Material available by January 2011: The Board of Studies had released the revised final study material which has been updated and modified. Entire study material along with Practice Manuals would be available at all branches of ICAI by January 2011.
(Refer pages 836-837 of CA Journal for December, 2010)

(viii) In case of reconstitution of a firm, wherever Form 18 duly signed by the remaining partners and the resignation letter of outgoing partner(s) is received, the office will take such reconstitution on record as per the current practice.

(ix) Wherever the firm is ‘at will’ as per the deed of partnership and the retirement of a partner(s) is informed and Form 18, accompanied by a certified copy of partnership deed, can be submitted duly signed by the remaining/surviving partners of the firm. In such a case, the fact of such retirement will be informed to the outgoing partner(s) concerned giving a notice by recorded delivery mode of 14 days to inform the factual position. In case no response is received, the reconstitution of the firm will be taken on record. If an objection is received, the reconstitution of the firm will not be taken on record and the firm as well as the outgoing partner(s) will be informed about the option of availing the forum of Dispute Resolution Mechanism of the Institute.

(x) Wherever the firm is ‘at will’ as per the deed of partnership and the partnership deed has vested in the Managing Partner of the firm to perform certain specified acts which includes reconstitution of firm on his own he can, in pursuance of such authority, inform the Institute and submit Form 18 accompanied by a certified copy of partnership deed, duly signed by the re-maining/surviving partners of the firm. The fact of such Form 18 specifying the act will be informed to the outgoing partner(s) concerned giving a notice by recorded delivery mode of 14 days to inform the factual position. In case no response or confirmation is received, the reconstitution of the firm will be taken on record. If objection is received, the reconstitution of the firm will still be taken on record and the aggrieved members can move the Dispute Resolution Mechanism.

(Refer page 842 of CA Journal for December, 2010)

4. Dispute Resolution Mechanism:
The Council of ICAI has announced the development of Alternate Dispute Resolution Mechanism (Arbitrator) for dealing with disputes of (i) Member v. Member and (ii) Member v. Student.

5. ICAI News:

(Note?: Page Nos. given below are from the CA Journal for December, 2010)

(i) Discrepancies noticed by Peer Reviewers during Review Process:
Peer Review is directed towards maintenance and enhancement of quality attestation services and to provide guidance to improve their performance and adhere to various statutory and the other regulatory requirements. Some of the discrepancies noticed during the course of Peer Review of records of some of the members have been reported on page 968.

(ii) New Publication of ICAI:
(a) Background Material for Audit Training Work-shops and Seminars (A manual of Presentations on Standards on Auditing and other Engagement Standards) has been published by the Institute.
(page 972)

(b) Revised Guidelines and FAQs for Training of Articled Assistants outside India. (page 973)

(iii) Empanelment with C & AG:
Applications for empanelment with C & AG by firms of Chartered Accountants for 2011-12 can be made after 1-1-2011. Details published on page 972.

(iv) Multipurpose Empanelment Forms:
Details about Multipurpose Empanelment Forms (Including Bank Branch Auditor’s Empanelment) have been published on pages 975-977.

ICAI And Its Members

1. Disciplinary case :

In the case of ICAI v. Shri M. K. Sachdeva, the member was concurrent auditor of one of the branches of Punjab National Bank. The Bank filed a complaint against the member alleging that while conducting concurrent audit of branch he got opened a current account with that branch in the name of a finance company in which he was a director. The account was introduced by him in his capacity as partner of his audit firm. The Bank purchased 3 cheques of Rs.1.97 lacs, 1.92 lacs and 1.97 lacs on different dates from the finance company which were returned unpaid. At the behest of the member these cheques were not debited to the account of the finance company. The finance company later on deposited two cheques of Rs.1.97 lacs and 2.00 lacs in its account which were also returned unpaid. It was alleged that the above-mentioned transactions of purchase of cheques were entered into by the branch under the influence of the member who was a director of the finance company and was also a concurrent auditor of the branch of the Bank.

The Disciplinary Committee found that the member was guilty of ‘Other Misconduct’. This finding of the committee was accepted by the Council and it recommended to the Delhi High Court that the member be awarded punishment by removal of his name for 3 months from the Register of Members.

The High Court while accepting the above recommendation of the Council observed that the allegations made against the member are quite serious in nature and his acts show that he is guilty of misconduct and had acted in a manner unbecoming of a chartered accountant. The High Court also observed that there has to be some degree of integrity and probity which is expected of a chartered accountant who is regularly concerned with financial transactions and it is not part of his duty to misappropriate the money belonging to his client. The Court also noted that a criminal case had also been registered against the member and he was absconding. Under the circumstances, the Court was of the view that the punishment awarded to the respondent was not at all harsh.

(Refer page 910 of C.A. Journal, December, 2009)

2. Some ethical issues :

The Ethical Standards Committee of ICAI has clarified whether a Chartered Accountant can advertise his professional attainments or services as under.

As per Clause (7) of Part-I of the First Schedule of the CA Act read with S. 11, a member shall be deemed to be guilty of professional misconduct, if he advertises his professional attainments or services. Now the Act has been amended and a proviso has been inserted in the Clause (7). The proviso says that a member in practice may advertise through a write-up setting out the services provided by him or his firm and particulars of his firm, subject to such guidelines as may be issued by the Council. Thus, due to addition of this proviso now a Chartered Accountant in practice is allowed to advertise. But it has to be as per the Guidelines of the Council. Here attention is drawn to Clause (6) of Part-I of the First Schedule which says that if a Chartered Accountant solicits clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means, it would be treated as professional misconduct. So, if proviso to Clause (7) and wordings of Clause (6) are compared, it appears that an impossible situation is created since Clause (6) prohibits advertisement and Clause (7) allows advertisement. However, there is no contradiction as in Clause (6) only the advertisement for soliciting of clients or professional work is prohibited. Thus other advertisements which do not solicit clients or professional work are not covered under this Clause. Whereas Clause (7) prohibits a Chartered Accountant from advertising his professional attainments or services, but the proviso permits to advertise through a write-up setting out the services provided by him or his firm and particulars of his firm, subject to such guidelines as may be issued by the Council. Thus, advertisement, in a limited way through a write-up, as per the Council guidelines and not soliciting of clients or professional work is permitted. Details are clarified in Advertisement Guidelines issued by ICAI on 14-5-2008 as reproduced at pages 890-891 of C.A. Journal for December, 2009.

3. Determination of current liabilities — EAC opinion :

A company has interest in energy segment both in India and overseas, like liquid fuel, thermal, hydro, stake in coal mines, etc. The company is also having various business plans/strategies to diversify further into segments like transmission, etc. The company made bids for various transmission bids announced by the Government of India through its various bodies corporates.

In order to qualify as a successful bidder for any transmission/power project, etc., all bidders have to fulfil various financial and technical criteria as per the requirements of the respective bid documents. Among others, some common financial criteria are to meet the minimum requirement of Internal Resources Generation (IRG) and net worth of the bidder either solely or in combination of consortium members as per the conditions of the bid documents.

The company shows, as per Schedule VI of the Companies Act, 1956, all working capital facilities, bill discounting facilities and short-term loans under the head ‘secured loans’/’unsecured loans’ even though they are in the nature of current liabilities as per the Guidance Note on Terms used in Financial Statements issued by ICAI.

Recently, the company sought an opinion of the Expert Advisory Committee of ICAI on the question whether the working capital facilities, bill discounting facilities and short-term loans shown under the heads ‘secured’ and ‘unsecured’ loans are to be considered as ‘current liabilities’ while working out net current assets of the company.

After considering the definition of the term ‘current liability’ as contained in para 3-35 of the above Guidance Note, the committee has given its opinion that all liabilities including loans, whether secured or unsecured, payable within a time period of twelve months should be considered for calculating ‘current liabilities’, irrespective of the fact that the same are not shown under the head ‘current liabilities’ in the balance sheet as per the requirements of Schedule VI of the Companies Act, 1956.

(Refer pages 911 to 912 of C.A. Journal, December, 2009)

4. Some instances of non-compliance with reporting obligations :

The Financial Reporting Review Board (FRRB) has, during their review of some published accounts have come across the following instances of common non-compliances of Reporting Obligations of our Members. These are published on P. 979-980 of CA journal of December, 2009.

i) AS 2 — Valuation of inventories :

It was observed that according to the policy of the company, inventories of raw materials, work-in-progress, stores and spares parts, goods-in-progress and by products were valued at cost. The policy indicates that apparently the enterprise is not considering the net realisable value (NRV) in the valuation of raw materials and work-in-progress. This is not as per AS 2. Paragraph 5 of AS 2 requires all inventories, including raw materials, work-in-progress to be valued at the lower of cost and net realisable value.

ii) AS 6 — Depreciation accounting :

It was observed that some of the enterprises adopt depreciation rates, for certain assets, that are different from the rates as specified in Schedule XIV to the Companies Act, 1956. Further, the enterprises also do not disclose the useful lives or the depreciation rates that have been adopted for such assets. It is in non compliance of the Companies Act, 1956 as well as AS 6.

iii) AS 9 — Revenue recognition :

Some enterprises include two amounts of excise duty, relating to both opening stock as well as closing stock, in the statement of profit and loss but fail to give any explanatory note in the note to accounts to explain their nature. It may be mentioned that as per paragraph 3 of ASI 14 of Accounting Standard 9, Revenue Recognition, requires that “The excise duty related to the difference between the closing stock and opening stocks should be recognised separately in the statement of profit and loss, with an explanatory note in the notes to accounts to explain the nature of two amounts of excise duty”.

iv) AS 10 — Accounting for fixed assets :

Some enterprises include in the Schedule of Inventory those items of fixed assets which have been retired from active use and are held for disposal as an inventory item. It is not in line with para 14.2 of Accounting Standard (AS) 10, Accounting for Fixed Assets and para 3 of Accounting Standard (AS) 2, Inventory Valuation.

v) AS 13 — Accounting for investments :

Accounting Standard (AS) 13, Accounting for Investments, require provision to be created to recognise a decline, other than temporary, in the value of long-term investments. Some enterprises use the term ‘permanent diminution’ instead of ‘other than temporary’, which is contrary to the requirement of AS- 13. It may be noted that there is a difference between ‘permanent diminution in the value of investments’ and ‘other than temporary diminution in vale of investments’ and normally, no diminution in value of investments may be termed as ‘permanent’.

5. ICAI News :

Note : Page Nos. given below are from CA Journal for December, 2009

i. Late Shri Rahul Roy :

Shri Raul Roy who was the youngest President of ICAI in 1998- 99 died at Kolkata on 19-11-2009 at a very young age of 46 years. We pay our sincere homage to the departed soul and pray that his soul may rest in peace. (page 878)

ii. Exposure drafts :

The following exposure drafts are published for comments by Members :

a) Accounting Standard 25 — Interim Financial Reporting (page 999)

b) Standard on Review Engagements (SRE) 2410 dealing with Review of Interim Financial Information performed by the Independent Auditor of the Entity. (page 1010)

iii. Empanelment with C & A.G. :

Applications are invited online from firms of Chartered Accountants who intend to empanel with C & A.G. for 2010-11 for appointment of Auditors of Government companies/corporations. The last date is 10-3-2010. The application forms will be available on ICAI website from 1-1-2010 to 15-2-2010. (page 988)

iv. Regular classroom teaching for students :

Regulations and policies are changing on a regular basis and with the new direct taxes code, the imminent induction of the GST and other laws, the pressure on members and the C.A. profession is increasing day by day. Students too are bearing the brunt of this changing world and the need of the hour is to help them see through these difficult times with ease. To help students get a clear understanding of concepts which will help them clear all their written exams, ICAI has decided to step forward and launch regular classroom teaching classes. These classes will cover the entire CA curriculum from A to Z. Students will reap the benefits of attending these classes which have been specially structured to provide personalised attention and help them prepare for all exams from CPT to Final with peace of mind. On an experimental basis the first series of classes are launched at the Western Regional Office on November 30, 2009. (page 874)

v. Know your clients :

With increasing incidence of economic offences in the Country and threat of terrorism and money laundering looming large over the society, it has become of utmost importance to know the credentials of our clients. As a watchdog of financial sector, it is our national duty and social responsibility to report about our ambiguous clients and their unscrupulous activities to the authorities concerned. To facilitate this, ICAI proposes to formulate and put in place ‘Know Your Client’ norms, having through checklist and guidelines, for CA profession on the lines of ‘Know Your Customer’ norms in place in banking industry. (page 875)

6. ICAI Elections :

The elections for Central Council and Regional Councils were held on 4-5 December, 2009. It is reported that following members are elected to Central Council from Western Region for 3 year term from 2010-2012. Results of election to WIRC is awaited.

Sarvashri (i) R. S. Adukia, (ii) Atul Bheda, (iii) Jayant Gokhale, (iv) Pankaj Jain, (v) Sanjeev Maheshwari, Mahesh Sarda, (vii) Dhinal Shah, (viii) Jaydeep Shah, (ix) Nitesh Vikamsey, (x) S. B. Jaware and (xi) Bhavna Doshi.

7. CPE hours :

ICAI has, by notification dated 15-12-2009, announced that the time limit for compliance with the requirement of CPE hours for structured learning for members holding Certificate of Practice for 2009 has been extended from 31-12-2009 to 31-1-2010. Members may note this change.

ICAI And Its Members

ICAI and Its Members

1. Disciplinary case :

In the case of ICAI v. Vijay R. Ashar, reported on P.
1006 of C.A. Journal for December, 2008, it was reported to the Institute that
the member had audited the accounts of a company in which the wife of the member
had substantial interest (holding more than 20% equity shares). It was also
reported that the member did not disclose the nature of his wife’s interest in
his audit reports given to the company for all the six years for which this
complaint was filed with ICAI. It was alleged that by not disclosing his
interest, the member had violated the guidelines issued by ICAI.

The Disciplinary Committee, after hearing the parties and
examining the evidence, held that the member had violated Clause (4) of Part I
of Second Schedule to the C.A. Act and, therefore, he was guilty under that
clause. The Council of ICAI accepted this finding and referred the matter to the
Bombay High Court with a recommendation that the member be reprimanded.

The High Court has held as under :

That Code of Conduct for the chartered accountants framed
by the Institute of Chartered Accountants of India provides that where the
partner or relative of the member as a director in the company holds
substantial interest, the member may desist from undertaking audit of the
financial statements and/or expression of opinion and if the member feels that
his independence is not affected and undertakes the audit of such company, he
should disclose such interest in his report while expressing his opinion on
the financial statement of such company. The explanation of the member before
the Disciplinary Committee was that he was ignorant of the said guidelines.
The Court was of the view that the explanation put forth by the member was
hardly acceptable. It could not be believed that as a professional chartered
accountant in practice, he was not aware of the guidelines and the Code of
Conduct framed by the ICAI.

The High Court, accordingly, concurred with the finding
recorded by the Disciplinary Committee and accepted by the Council, that the
member had violated Clause (4) of Part I of the Second Schedule of the Act.
Accordingly, the Court held that the recommendation of the Council that the
member be reprimanded is reasonable and rather lenient.

It may be noted that in Clause (4) of Part I of the Second
Schedule as amended by the Chartered Accountants (Amendment) Act, 2006, w.e.f.
17-11-2006, it is provided that a member cannot express his opinion on financial
statements of any business or enterprise in which he, his firm, or a partner in
his firm has a substantial interest. In other words, a member or his firm cannot
accept audit assignment of a company in which he or his partner or his relative
has substantial interest.

2. MOU between ICAI and ICAEW :

ICAI has signed an MOU with the Institute of Chartered
Accountants in England and Wales (ICAEW) on 20-11-2008 at Jaipur. In brief, the
MOU provides as under.

(i) Existing members of ICAI, in good standing and with two
years post-qualification experience (availing credit of prior learning) will be
eligible for ICAEW membership on passing of only one paper of ICAEW on Case
Study. The ICAI members with less than two years’ experience ( not availing
credit for prior learning) will be required to appear for additional papers in
Business Reporting (T1) and Business Change (T2) along with Case Study. They
will also be required to pursue the structure training in ethics. There is no
additional requirement of undergoing any additional training experience
requirements or take any other examinations.

(ii) Existing members of ICAEW who are trained in public
practice will be become eligible for ICAI membership, subject to passing ICAI’s
examination papers for the special modules of Auditing & Assurance; Law, Ethics
& Communication; Information Technology & Strategic Management; and Taxation.

(For further details refer P. 955-956 of C.A. Journal for
December, 2008)

3. CPE Credit requirements for 3 years’ rolling period 2008-2010 :

Members may note the CPE Credit Requirements for three years’
rolling period 2008-2010, which are as under :

(i) For members holding certificate of practice (excluding
members residing abroad), unless exempted,

— 60 CPE credit hours (Minimum 20 credit hours each year)
of structured learning during 2008- 2010.

— 30 CPE credit hours of structured/unstructured learning
during 2008-2010.

— For members above 60 years of age, the CPE credit hours
of structured/unstructured learning required is of 70 credit hours (Minimum 10
credit hours in 2008 and 20 credit hours in each year thereafter) during
2008-2010.

(ii) For members not holding certificate of practice and all
members residing abroad, 45 CPE credit hours (Minimum of 10 credit hours each
year) of structured or unstructured learning during 2008-2010. For members above
60 years of age, this period is 35 credit hours during 2008-2010 (Minimum 5 in
2008 and 10 in each year thereafter).

(Refer Page 1057 of C.A. Journal, December 2008)

Note : It is reported that during the period
1-1-2008—10-11-2008 ICAI, its Regional Councils, Branches, Study Circles, etc.
have generated about 7,65,000 CPE credit hours. Out of about 70000 members
(excluding senior members and members residing abroad) holding C.P., about 14000
members have completed the minimum requirement for CPE credit hours. Details
about CPE credit hours of each member can be obtained through CPE Portal,
www.cpeicai.org .

4. Accounting and Auditing Standards :

(Note : Page Nos. given below are from C.A. Journal
for December, 2008)

(i) The following Accounting Standards are published :

(a) Accounting Standard for Local Bodies (ASLB)

– ASLB-3 ‘Revenue From Exchange Transactions’

This Standard deals with revenue recognition on sale of goods, rendering of services yielding revenue and use by others of entity assets yielding interest, royalties and dividends (Pages 1072- 1079).

– ASLB-4 ‘Borrowing Costs’

This Standard deals with Borrowing Costs i.e., interest and other costs incurred by an entity in connection with the borrowing of funds (Pages 1080-1084).

ii) The following Revised Auditing Standards are published:

a) Revised Standard on Auditing (SA) 250 ‘Consideration of Laws and Regulations in an Audit of Financial Statements’ (Pages 1085-1090).

b) Revised Standard on Auditing (SA) 260 ‘Communication with Those Charged with Governance’ (Pages 1091-1100).

c) Revised Standard on Auditing (SA) 570 ‘Going Concern’ (Pages 1101-1107).

iii) Standard on Internal Audit (SIA) 8 on ‘Terms of Internal Audit Engagement’ has been published on Pages 1108-1109.

iv) The following Exposure Drafts are published for comments by members by 12-1-2009:

a) Standard on Internal Audit (SIA) – ‘Enterprise Risk Management’ (Pages 1110-1111).

b) Standard on Internal Audit (SIA) – ‘Internal Control Evaluation’ (Pages 1112-1116).

5) Engagement by students in business or other occupation:

An articled/ audit assistant (student) cannot engage himself or herself in any business or other occupation without the previous approval of the Council of ICAI. He/she has to apply in Form No. 112 duly recommended by the principal with whom articled/ audit service is registered. This permission is normally granted by the Council in the following cases if the conditions stated on pages 1058-1059 of CA. Journal for December, 2008 are satisfied.

(i) Teaching:

This engagement should be before or after the office hours. Further, it should be in the same city or town. The number of hours for the teaching assignment should not exceed the prescribed hours.

(ii) For Directorship:

The directorship should be in a company in which the family of the student has majority interest. The company should be in existence before the articled/audit service started. The principal or the firm in which the student is working as articled/ audit assistant should not be the auditor of the company. The student should not be actively engaged in the business of the company and should not receive any remuneration other than director’s meeting fees.

(iii) Sleeping Partner:

The student can be a sleeping partner in the family concern. Strict conditions are laid down for granting this permission.

(iv) Additional vacancies for Articled Assistants:

This is granted by the Council under Regulation 57 for the reasons stated on page 1059 and on compliance of certain conditions stated therein.

6. Campus Placement Programme:

ICAI organised this programme during August – September, 2008 at 16 cities for those candidates who qualified in May, 2008, examination. In all, 3817 candidates had the opportunity to avail this service. The interviews were conducted by 149 Interview Boards representing 77 organisations. The following figures will indicate the importance of this exercise which is undertaken by ICAI twice in a year (Refer Page 1040 of CA. Journal for December, 2008).

i) Range of annual salary packages offered and number of candidates selected:

7. ICAI News

(Note: Page Nos. given below are from CA. Journal for December, 2008)

i) Enhancing Audit Quality:

Some observations made by the Financial Reporting Review Board are listed in order to enable members to improve the quality of audit of corporate bodies. These observations relate to major non-compliances relating to

a) AS-2 ‘Valuation of Inventories’,

b) AS-3 ‘Cash Flow Statements’,

c) AS-5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’,

d) AS-9 ‘Revenue Recognition’ and

e) AS-13 ‘Accounting for Investments’ (Page 1033).

ii) Revised Resolution under Regulation 190A of CA. Regulations:

ICAI Council has passed a Resolution under Regulation 190A specifying the activities in which a practising CA. can engage either with the specific permission or without the permission of the Council. This Resolution is published as Appendix No. (9) of CA. Regulations. The following modifications are made in the Resolution w.e.f. 9-8-2008 (Refer Page 1054):

(i) No specific permission is now required for holding “Interest in agricultural land and allied activities carried on with the help, if required, of hired labour”.

(ii) General permission is now granted for the following activity.

“Owning agricultural land and carrying on agricultural activity.”

(iii) Empanelment of CA. Firms with C&AG for 2009-10 :

Applications can be made online by CA. Firms to C&AG for Empanelment for appointment as auditors of Government Companies/Corporations for the year 2009-10. The format of application along with detailed instructions will be available on the web site ‘www.cag.gov.in’ from 1-1-2009 to 16-2-2009. The last date for receipt of specified documents by C&AG is 27-2-2009. (Refer Page 1057)

iv) Forensic Accounting:

A certificate course for CAs on ‘Forensic Accounting and Fraud Detection’ is being started by ICAI. (Page 949)

v) lFAC Board:

Shri Ved Jain, our President, has been appointed as member on the Board of International Federation of Accountants (IFAC) for a term of 3 years w.e.f. 13-11-2008.Our best wishes to him for a successful term of office. (Page 952)

(vi) New Publications by lCAl (Page 1055) :
(a) Principles and Practice of Life Insurance
(b) Principles and Practice of General Insurance
(c) Risk Management and Reinsurance
(d) Business Strategic Planning and Information Technology for Insurance Sector
(e) Code of Ethics

ICAI And Its Members

1. Companies Bill, 2009 — Appointment and qualifications of directors:

As reported in the earlier issues, the above Bill is pending before the Parliament. The Standing Committee on Finance has submitted its report to the Parliament on 31-10-2010. Several suggestions have been made by this Committee and the Bill is likely to be modified and discussed in the Parliament during the coming few months. Some important changes relating to appointment and qualifications of directors are suggested in the Bill. These are contained in clauses 132-153 of the Bill. The changes suggested are as under:

(i) Clause 132 of the Bill provides that the minimum number of directors shall be three in the case of a public company and two in the case of a private company. As regards one-person company, the minimum number shall be one. It is, further, provided that the maximum number of directors in any company cannot exceed 15, excluding directors nominated by the lending institutions. Further, at least one director should be a resident in India. The company will be entitled to increase the number of directors beyond 15 after passing a special resolution of the shareholders at the general meeting.

(ii) In the case of a listed company, having such amount of paid-up share capital as may be prescribed, the requirement will be that it shall have atleast 1/3rd of the total number of directors as independent directors. The Central Government may prescribe the number of independent directors in case of other public companies and subsidiaries of any public company.

(iii) The term ‘Independent Director’ has been defined in clause 132(5). According to this definition, a nominee director is not to be treated as an independent director. The other conditions for an independent director are as under:

(a) The director should be a person of integrity and should possess relevant expertise and experience; or

(b) The director or his/her relatives —

should not have pecuniary relationship or transaction with the company, its holding, subsidiary or associate company or promotors amounting to 2% or more of its gross turnover or total income during the two immediately preceeding financial years or during the current financial year.

should not hold or should not have held any senior management position or as key managerial personnel or as employee of the company in any three immediately preceeding relevant financial years.

is or has been employee or a partner, in any of the three immediately preceeding financial years, of a firm of auditors, company secretaries or cost auditors of the company or its associates.

is or has been employee or a partner of a legal or consultancy firm which had in any of the three immediately preceeding financial years transaction with the company or its associates amounting to 10% or more of the gross turnover of the firm.

holds, in aggregate, 2% or more of the total voting power of the company.

he is a chief executive or director of any non-profit organisation that receives 25% or more of its income from the company or its associate or holds 2% of more of the total voting power of the company, or

(iv) The role, duties and functions of an independent director will be prescribed by the Central Government by way of rules.

(v) The independent directors shall not be entitled to any remuneration other than sitting fees, reimbursement of expenses, for participation of board and other meetings and profit-related commission, stock option as may be approved by the shareholders.

(vi) An independent director shall not have a tenure exceeding, in the aggregate, a period of six consecutive years on the board of a company. However, after the lapse of three years, he can be appointed as an independent director for up to six years provided that no such director can have or shall have more than two tenures as independent director in any company.

(vii) In clause 146, it is provided that no person shall hold office as director, including any alternate directorship, in more than 10 public limited companies at the same time. Further, it is also provided that, out of the above, maximum number of listed companies in which such a person can be appointed as a director shall not exceed 5.

(viii) Clauses 132-153 contain other provisions relating to mandatory requirement of obtaining DIN, appointment of additional directors, disqualification of directors, duties of directors, their resignation, removal, etc. These provisions are more or less the same as in the existing Companies Act.

2. Treatment of capital expenditure on assets not owned by the company:

A Public sector undertaking registered under the Companies Act, 1956, is engaged in refining and marketing of petroleum products. When a new project by setting up of new refinery is undertaken by the company, it has to incur expenditure on the construction/development of certain assets, like electricity transmission lines, railway sliding, roads, culverts, bridges, oil jetty, etc., in order to facilitate construction of project and subsequently to facilitate its operations. The ownership of such assets (enabling assets) as well as the land on which these assets are situated does not vest with the company.

The existing accounting policy of the company in respect to such ‘enabling assets’ is as under:

(a) Fixed assets which are owned by the company, but built on land not belonging to the company, are treated as fixed assets belonging to the company.

(b) As regards fixed assets constructed, which are not owned by the company, on land not belonging to the company, the expenditure incurred on the constructions of such assets has been classified as ‘Capital Expenditure’ in the balance sheet indicating appropriately, the nature of the expenditure including the fact that the assets are not owned by the company, and after commencement of commercial operations, the same is written off to the profit and loss account.

However, the statutory auditors of the company are of the opinion that existing accounting treatment of such ‘enabling assets’ followed by the company does not appear to be correct. According to them, (a) expenditure should be debited to Capital Work In Progress (CWIP) till the enabling asset is ready for use. (b) On completion of the enabling asset, the same should be capitalised. (c) Such capital expenditure should be reflected as ‘Capital Expenditure on Assets not owned by the Company’. (d) Such capital expenditure should be amortised over the period of its utility, but not exceeding 5 years and (e) Amount amortised should be treated as expenditure during the construction period till the completion of the project, for which the enabling asset was originally created. After the completion of the project, the amortised amount is to be charged to the profit and loss account every year for the balance period of its utility.

Query:

On these facts, the company has sought the opinion of the EAC whether the accounting treatment followed by the company in respect of expenditure incurred on ‘enabling assets’ as CWIP during construction period of the project and charging off the same to the revenue in the year of completion of the project is correct?

EAC opinion:

After considering paragraphs 49 & 88 of the ‘Framework for the Preparation and Presentation of Financial Statements’ the Committee has taken the view that expenditure incurred by an enterprise cannot be recognised as an asset as resource is not controlled by the enterprise. An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise. Further, the Committee has taken the view that an indicator of control of an item of fixed asset would be that the entity can restrict the access of others to the benefit derived from the asset. From the facts of the case it is evident that the ownership of the ‘enabling assets’ does not vest with the company. The assets are available for general public use. Although the company is entitled to use these assets for the purpose of completing its own projects and subsequently for operational purposes, it has no say on the use of such assets by others. Thus, ‘enabling assets’ are not resources controlled by the company and, therefore, the expenditure incurred by the company on such ‘enabling assets’ can not be capitalised as assets either tangible or intangible considering AS-10 and AS-26. Further, the expenditure incurred on ‘enabling assets’ cannot be considered as directly attributable to such assets and therefore the same can not be capitalised.

In view of this, the Committee has taken the view that expenditure incurred on ‘enabling assets’ should be expensed and charged to profit and loss account of the period in which these are incurred.

As far as accounting treatment given by the company in respect of such ‘enabling assets’ which are still lying as CWIP, the Committee has taken the view that the same is an error committed in the prior years by the company, which should be rectified in the financial statements and disclosed as a ‘prior period items’ of the period in which such rectification is carried out in accordance with the requirements of Accounting Standard (AS) 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”.(Pages 1040 to 1045 of C.A. Journal of January, 2011)

3. ICAI News:

(note : Page nos. given below are from January, 2011 C.a. Journal)

(i) CPE in e-Learning mode:
The Council of ICAI has approved CPE in e-Learning Mode. This decision will facilitate learning for the members just at the click of the mouse. In other words, this will help members to persue CPE Programme conveniently without undertaking the hardship of physical attendance and will prove to be beneficial for each member. (Page 1001)

(ii) Certificate course on valuation:
It is reported that 800 members of our Institute have been registered for certificate course on ‘Valuation’. Examinations are being held in batches at various places all over India. (Page 1001)

(iii) Suggested answers for examination members:
ICAI has hosted suggested answers for the examinations held in November, 2010 on its website. It is reported that the entire study material for the final course has been revised/modified substantially. This will be available to the students in the month of January through their respective branches/regions. (Page 1002)

(iv) Bank branch auditors’ panel for NABARD:
Bank Branch Auditors’ Panel by the Professional Development Committee of ICAI has prepared a Bank Branch Auditors’ Panel for the year 2010-11 and submitted the same to NABARD for appointment of statutory auditors for regional rural bank and state/district central co-operative banks. (Page 1002)

(v) Empanelment of CA firms with C & AG for 2011-12:
C & AG has invited online applications from firms of CAs who wish to empanel for the year 2011-12 for appointment as auditors of Government companies/corporations. Format of the application is available on the website : www.cag.gov.in CA firms can apply or update the data showing status of the firms as on 1-1-2011. This application can be submitted by 31-3-2011. Any changes in the constitution of the firm occuring from 1-1-2011 onwards should continue to be updated by the CA firm in the website which will be available through out the year. (Page 1132)

(vi) New publications of ICAI:

(a) ICAI has published Compendium of Standards on Internal Audit. (As on 1-10-2010)

(b) ICAI has also published Compendium of Opin-ions given by the Expert Advisory Committee (Vol. XXVIII). (Page 1132)

(vii) Grievance cell at WIRC:

A grievance cell has been formed to address issues of members and students related to administrative matters. Members can send the issues by e-mail to grievance@wirc-icai.org or in writing to WIRC. The members of the Grievance Cell are Chairman, Secretary, Shruti Shah, Neel Majithia, (RCMs) and Students Counsellor.

(viii) Extension of CPE Block:

Members may note that ICAI has decided to extend the CPE Block periof of 3 years ending on 31st December, 2010, by three months, i.e., to 31st March, 2011.

(ix) Recognition for Doctoral programme:

IIM Kozhikode & IIM Shillong has recognised Chartered Accountancy qualification as an eligibility to pursue their Doctoral programme i.e., Fellow Programme in Management.

(x) Placement programme:

ICAI has recently organised a special placement programme through video conferencing mode for the organisations functioning in GCC/Middle East countries.

(xi) Arbitration course:

ICAI has created a panel of Arbitrators through the certificate course on Arbitration.

ICAI And Its Members

ICAI and Its Members1.
Disciplinary Case :

In the case of ICAI V/s Shri K.K. Gupta, a complaint was
filed by the RHO Welfare Association against the member. It was alleged that the
member was grossly negligent in the conduct of the audit of books of the
association on the following counts:

(i) The member had written the books of accounts for the
two years under audit and also audited and given audit reports for these two
years. This was against the code of conduct of ICAI.

(ii) In spite of several requests, he did not return the
books of accounts, vouchers, statements, etc., to the association.

(iii) The member did not give effect to various decisions
of the General Body of the Association while preparing and auditing the
accounts.

(iv) When the association managed to collect the books of
accounts for one of the years, it was noticed that some of the balances, as
per the accounts, did not tally with the figures in the audited accounts.

(v) The member did not come forward to explain the above
discrepancies in the accounts and audited statements.

(vi) No provision was made in the accounts for outstanding
liabilities for salaries, wages, electric charges, water charges, etc., and
the audit report was not qualified for this non-provision.

The Disciplinary Committee, after examining the evidence,
held that the member was grossly negligent in the performance of his
professional duties and was also guilty of other misconduct. He had not complied
with the requirements of the Code of Conduct. The council accepted this decision
and recommended to the High Court that the name of the member be removed from
the Register of Members for one year.

The Delhi High Court has held that the member was guilty of
professional misconduct and other misconduct and confirmed that his name be
removed from the Register of Members for a period of one year.

(Refer P. 1065
of the C.A. Journal for January, 2010)

2.
Some Ethical Issues :

The Ethical Standards Committee of the ICAI has clarified
about the publication of a CA’s expertise, specialisation and knowledge in any
particular field when he is appointed as a director on the Board of Directors of
a company as hereunder:

The Council’s attention has been drawn to the fact that more
and more companies are appointing chartered accountants as directors on their
boards. The prospectus or public announcements issued by these companies often
publish descriptions about the chartered accountant’s expertise, specialization
and knowledge in any particular filed or add appellations or adjectives to their
names. Attention of the members in this context is invited to the provisions of
Clause (6) and (7) of Part I of the First Schedule to the CA Act.

In order that the inclusion of the name of a member of the
institute in the prospectus or public announcements or other public
communications issued by the company in which the member is a director, does not
contravene the above noted provisions, it is necessary that members take
necessary steps to ensure that such prospectus or public announcements or public
communications do not advertise his professional attainments; and also that such
prospectus or public announcements or public communications do not directly or
indirectly amount to solicitation of clients for professional work by the
member. While it may be difficult to lay down a rigid rule in this respect,
members must use their good judgement, depending on the facts and circumstances
of each case, to ensure that the above noted provisions are complied with both
in letter and spirit.

It is advisable for a member that as soon as he is appointed
as a director on the board of a company, he should specifically invite the
attention of the management of the company to the aforesaid provisions and
should request that before any such prospectus or public announcements or public
communication mentioning the name of the member concerned is issued, the
material pertaining to the member concerned should, as far as is practicable, be
approved by him.

(Refer P.1052 of the C.A. Journal for January, 2010)

3.
Some instances of non-compliance with reporting obligations

The Financial Reporting Review Board (FRRB) has, during their
review of some published accounts, come across the following instances of common
non-compliance of reporting obligations by our members. These are published on
P. 1158 – 1160
of the C.A. Journal of January, 2010.

(i) AS – 22 – Certain enterprises disclose advance income
tax paid (current tax asset) and provision for income tax (current tax
liability) separately in their balance sheets, i.e., they do not offset the
amounts. This is contrary to AS 22, Accounting for Taxes on Income. Paragraph
27 of AS 22 requires that an enterprise should offset assets and liabilities
representing current tax if the enterprise:

(a) Has a legally enforceable right to set off the
recognised amounts ; and

(b) Intends to settle the asset and the liability on a net
basis.

(ii) AS – 22 – It has been observed in the case of a few
enterprises that the balances of unabsorbed depreciation and/or losses are
being carried forward under tax law, due to which the deferred tax asset has
been recognised in the financial statements. However, it omits to disclose the
nature of evidence that supports the recognition of such deferred tax assets
with virtual certainty.

(iii) As – 22 – In case of the financial statements of a
few enterprises, it is observed that it has disclosed only the opening
balance, addition during the year and the closing balance of the deferred tax
assets and liabilities,. Also thereis no disclosure of the break-up of the
deferred tax assets and liabilities into their major components which is not
as per the requirements of AS 22.

(iv) Schedule VI to the Companies Act

a) In case of the financial statements of a few enterprises, it was noted that the opening balance of certain specified reserves do not tally with their closing balance of the last year. Neither the notes to accounts nor the schedules contain any information regarding the

differences in such balances. It may be noted that pursuant to the instructions given in Part I of Schedule VI to the Companies Act, 1956, under the head “Liabilities”, the additions and deductions since the last balance sheet are to be shown under each of the specified heads. Therefore, such differences should not arise in the financial statements.

Paragraph (xi) of Part II of Schedule VI of the Companies Act, 1956 requires that the amount of income tax deducted from the gross income from investments and interests should be disclosed. Some enterprises in their financial statements do not disclose the amount of income tax deducted from the gross income from investment and the interest. This is not in compliance with the requirements of Schedule VI of the Companies Act, 1956.

Paras 10 and 11 of the above note relate to some discrepancies noticed in audit reports on financial statements. The requirements, AAS28
(The Auditors’ Report on Financial Statements), have been explained.

Paras 12 to 15 of the above note relate to some discrepancies noticed in reporting under CARO
– 2003.

Members are requested to take note of these discrepancies and ensure that they are not repeated.

4. Corporate Governance Task Force Report

The CII had appointed a “Task Force” under the chairmanship of Shri Naresh Chandra on Corporate Governance Code. The Task Force has submitted its draft report to the Corporate Affairs Ministry. The ministry has published this report for the comments of the general public. (Refer the Chartered Secretary Journal for December, 2009, Pages 1768 – 1778). In dealing with “Role of Directors”, this report states:

i) Auditor – Company Relationship

The report of the Naresh Chandra Committee on Corporate Audit and Governance has suggested that auditors refrain from providing non-audit services to their audit clients. It has also recommended an explicit list of prohibited non-audit services. The Task Force noted that the recommendation has been endorsed by the Ministry of Corporate Affairs and has also been proposed under the Companies Bill, 2009. It concurred with the recommendation that the legislation should expressly prohibit auditors from rendering certain services to their audit clients. Audit firms should have to mandatorily disclose network agreements between audit firms and non-audit companies, pecuniary interests exceeding 2% between the audit firm and its affiliate non-audit

service firm or company, and Chinese wall and data protection /confidentially measures that are in place between them. The Task Force noted the existing practice in this regard and found it to be sufficient.

ii) Auditors’ Revenues from the Audit Client

Not more than 10% of the revenues of an audit firm, singly or taken together with its subsidiaries, associates or affiliated entitles, should come from a single corporate client or group with whom there is also an audit engagement.

iii) Certificate of Independence

Every company must obtain a certificate from the auditor certifying the firm’s independence and an arm’s length relationship with the client company. The Certificate of Independence should certify that the firm, together with its consulting and specialized services, affiliates, subsidiaries and associated companies or network or group entities have not /has not undertaken any prohibited non-audit assignments for the company, and are independent vis-à-vis the client company, by reason of revenues earned and the independence test are observed.

iv) Audit Partner Rotation

The Task Force considered the on- going debate on the requirements of rotation of audit versus rotation of audit partner after a specified period of time. The view that audit firms should be changed after 9 or 10 years was discussed. In line with the international practice, the Task Force considered it expedient to recommend mandatory rotation of audit partners after two terms of three years each. This would help discourage creation of any affinity between auditors and controlling shareholders or promoters or the management and may help to prevent “capture” of the audit process by corporate insiders. An initial experience of the impact of rotation of the audit partner should be studied. If this measure does not improve or prevent “capture of audit process by corporate insiders”, then the alternative of rotation of auditor’s after nine years should be made mandatory. Therefore, it is recommended that:

The partners handling the audit assignment of a listed company should be rotated after every six years. The partners, and at least 50% of the audit engagement team responsible for the audit, should be rotated every six years.

A “cooling-off” period of three years should elapse before a partner can resume the same audit assignment.

v) Auditor’s Liability

The firm, as a statutory auditor or internal auditor, has to confidentially disclose its net worth to the listed company appointing it. Each member of the audit firm is liable to an unlimited extent.

vi) Appointment of Auditors

The Audit Committee of the Board of Directors shall be the first point of reference regarding the

appointment of auditors. The Audit Committee should have regard to the entire profile of the audit firm, its responsible audit partner, his or her previous experience of handling audit for similar sized companies and the firm and the audit partner’s assurance that the audit clerks and/or understudy chartered accountants or paralegals appointed for discharge of task for the listed company, shall have done a minimum number of years of study of Accounting Principles and have a minimum prior experience as audit clerks.

In order to discharge the Audit Committee’s duty, the Audit Committee shall:

Discuss the annual work programme and the depth and detailing of the audit plan to be undertaken by the auditor, with the auditor;

Examine and review the documentation and the Certificate for Proof of Independence of the audit firm, and

Recommend to the board, with reasons, the appointment / reappointment or removal of the external auditor, along with the annual audit remuneration.

vii) Qualifications introduced by Statutory Auditors or Internal Auditors in their Audit Reports, Tax Audit Reports or CARO Reports

The Task Force recommended that the ICAI appoint a committee with a significant membership of government directors, and invited management professional and lawyers having an understanding of accounts to standardise the language of disclaimers or qualifications permissible to audit firms. Anything beyond the scope of such permitted language should require the auditor to provide a sufficient explanation and should not create a new escape route for avoiding responsibility for discharging the audit function diligently, as the public relies upon them to do a thorough job.

5. WIRC – Elections

The following members have been elected to WIRC for a 3-year term, from 2010 to 2012.

Sarvashri (i) Agarwal VK, (ii) Apte DM, (iii) Bhandari AS, (iv) Chhaira JA, (v) Gandhi DB, (vi) Hegde NC, (vii) Joshi MM , (viii) Joshi SY, (ix) Kabra DK, Khandelwal DK, (xi) Kinare MP, (xii) Lalan SD, Majithia NP, (xiv) Patel BK, (xv) Patodia SK, Pawar CV, (xvii) Raval PR, (xviii) Shah JM, Shah RN, (xx) Shah SD, (xxi) Shah SJ, and Sharma UR.

ICAI News

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

Accounting Standard (AS – 4) (Revised) Exposure Draft – Events after the Reporting Period

The Exposure Draft of this Standard has been published from Pages 1188 – 1192. Members are requested to send their comments by 1.2.2010. This standard corresponds to IAS 10. When finalized, this standard will supersede existing AS – 4 dealing with “Contingencies and Events Occurring After the Balance Sheet Date”.

ii) Campus Placement Programme

A Campus Placement Programme for newly qualified CAs has been organized by ICAI for those members who have passed the final CA Examination held in May, 2009 and November, 2009. The dates for the programme as reported on Page 1176 are as follows:

iii) Admission of IA & AS Officers in CA Profession

The ICAI Council has decided that Indian Audit and Accounts Service (IA & AS) officers working in C & AG offices can take up the CA course by complying with the prescribed requirements. Any IA & AS officer desiring to acquire CA membership will have to pass CPT, IPCC & CA Final Examination. He will also have to undergo three years Articleship. His service with C & AG office for one year will be considered as industrial training and he will have to undergo two years of Articleship with a practicing CA. (Refer Page 1038)

iv) New Guidelines for opening new branches of ICAI

At present, a branch of ICAI can be opened at a city if there are 150 members or more in that city or within a distance of 50 kms. from the city limits. Now, a new branch can be opened if there are more than 100, but less than 150 members, and there are more than 250 students in the city or within 50 kms. from the city. Further, if there is no branch in any district, a branch can be opened in any city of that district if there are at least 100 members in that district. (Refer Page 1038)

ICAI New Publication

Compendium of Opinions of EAC – Vol. XXVI. (Page 1171).

ICAI And Its Members

ICAI and Its Members

1. Disciplinary case :

In the case of ICAI v. Shri P. U. Patil, the Addl.
Collector of Customs had filed a complaint against the member alleging that the
member had issued false certificates of past exports to several parties without
verifying any supporting records or documents. On the strength of these false
certificates, certain unscrupulous importers were able to obtain import licences
and effect imports without payment of duty.

The allegations were examined by the Disciplinary Committee
of ICAI and it was found that the member was guilty of professional misconduct
under clauses (2), (7), and (8) of Part I of the Second Schedule to the C.A.
Act. The Council of ICAI accepted this finding and referred the case to the
Bombay High Court with recommendation to award punishment of removal of name of
the member for one month.

In the statement made before the customs authorities, the
member stated that his friend one Mr. ’D’ brought one certificate typed on the
letter-head of one of the importers and also brought one form of certificate to
be issued by him on his letter-head. The member requested Mr. ’D’ to produce the
relevant documents and records. However, Mr. ’D’ told him that the said importer
was known to him and, therefore, there was no need to verify the
records/documents. On this basis, the member issued the certificate without any
verification. The member had issued similar certificates to other parties also
on the basis of the recommendation of Mr. ‘D’. The member could not produce any
working papers before the Disciplinary Committee. The member did not attend
before the Bombay High Court. Considering the conduct of the member, the High
Court has ac-cepted the recommendation of the Council and held that the name of
the member be removed for one month. (P. 1198 of C.A. Journal for January,
2009.)

2. Compliance with CPE Credit Hours :

ICAI has made the following announcement.

(i) The time limit for completing the CPE Credit Hours for
2008 has been extended to 31-1-2009. In other words, a member may complete the
required 30 hours (including minimum 20 structured) of learning for 2008 by
31-1-2009. Similarly, members not in practice and senior citizens who have to
complete specified period (15 or 10) of unstructured learning in 2008 can
complete this period by 31-1-2009.

(ii) Members who have not completed the above CPE Credit
Hours of learning in a year will have to complete double the number of deficit
hours in the next year.

(iii) In cases where members holding certificate of practice
do not complete the CPE Credit Hours for 2008, the Council has decided that
names of such members will not be included in any panel that is forwarded by the
Institute, on or after 1st January, 2009, to any regulators or other
authorities. In the case of a firm, if any partner/paid assistant has not
completed the requisite CPE credit hours for the year 2008, the name of the
partner/paid assistant will not be included while considering the eligibility
criteria and this fact will be stated in case the firm is otherwise found
eligible after excluding names of such partners/paid assistants.

3. Accounting Technicians Course :

(i) The C.A. Regulations are amended by a Notification dated
2-12-2008 to give recognition to the above course for students. These amendments
are published on pages 1232-1236 of C.A. Journal for January, 2009. Broadly
stated, this course provides that a student who has passed 10 + 2 examination
can join this course after passing the CPT entrance examination. Thereafter, the
student needs to pass four papers in (a) Accounting, (b) Business Laws, Ethics
and Communication, (c) Cost Accounting and Financial Management, and (d) Direct
& Indirect Taxation after undergoing study course for about 9 months with the
Board of Studies. The student has also to undergo 100 hours computer training
and an orientation course. To ensure that the student has adequate practical
exposure, such student will be required to undergo practical training of one
year under a Chartered Accountant whether in industry or in practice before
he/she is awarded Accounting Technician Certificate (ATC). He/she will be able
to use designation as ‘Accounting Technician’.

(ii) The following categories of candidates are entitled for
grant of Accounting Technician Certificate and such students, for the purpose of
issue of the Certificate are required to make an application to ICAI at Regional
office. No fees are payable for getting this certificate.

(a) Passed Professional Competence Examination, in
entirety, and also completed the prescribed period of practical training, as
applicable at the relevant time including excess leave, if any.

(b) Passed Professional Education (Examination II), in
entirety, and also completed the prescribed period of practical training, as
applicable at the relevant time including excess leave, if any.

(c) Passed Intermediate Examination under the Chartered
Accountants Regulations, 1988, in entirety, and also completed the prescribed
period of practical training, as applicable at the relevant time including
excess leave, if any.

(d) Passed Intermediate Examination under the Chartered
Accountants Regulations, 1964, in entirety, and also completed the prescribed
period of practical training, as applicable at the relevant time including
excess leave, if any.

(e) Passed Intermediate or the First Examination under the
Chartered Accountants Regulations, 1949, in entirety, and also completed the
prescribed period of practical training, as applicable at the relevant time
including excess leave, if any.

(f) Exempted from passing the First Examination under the
Chartered Accountants Regulations, 1949, in entirety, and also completed the
prescribed period of practical training, as applicable at the relevant time
including excess leave, if any.

Note : The above application can be made online and the
relevant Form of Application appears on the website of the Institute at http://www.icai.org/addupdate/dec72008.php.

4. Changes in the C.A. Course for Students:

Some important changes are made in the existing CA. Course for the students. In the new scheme, any CPT pass student can get registered for ‘Integrated Professional Competence Course’ (IPCC) (new name for the course earlier called PCC) without articleship registration and can sit in the new IPCC exam after 9 months of registration. The new IPCC comprises 2 groups. Group 1 has 4 papers and Group 2 has 3 papers.

Though the number of papers of the IPCC has been increased from 6 to 7, there is no change in the syllabus. The existing syllabus on Accounting has been divided into two parts. The first part has been named as Accounting in Group I and the second part has been named as Advanced Accounting in Group H. Only on passing Group I of the IPCC will a student be eligible to get registered for articleship, which shall now be for a period of 3 years as against the existing requirement of 3 1/2. Further, under the new scheme, a student will be eligible to sit in the final exam in last six months of his articleship as against the existing condition to sit in final exam only after the completion of articleship.

The new scheme has come into effect from 10th December 2008.However, an option has been given till 30th June 2009to the existing CPT pass students and to those who appeared in CPT examination held on 14th December 2008to choose between the PCC and the new IPCC.Those students who have passed CPT and have not so far got themselves registered for articleship and also those who pass CPT exam held on 14th December 2008, are free and eligible to get registered under the new scheme for the IPCC after the declaration of CPT result without articleship registration. All such students getting registered for the IPCC on or before 31st January 2009 will be eligible to sit in the new IPCC exam scheduled for November, 2009, as they will have completed 9 months of study by that time.

Details of the new course are given in the Notification dated 2-12-2008published at pages 1232-1236 and on pages 1238-1239of C.A. Journal for January, 2009.

5. Internal Audit – Standards & Exposure Drafts (SIA) :

(Note: Page Nos. below are from CA. Journal for January, 2009)

A. Standards on Internal Audit (SIA) :

(i) SIA-9 Communication with Management (Pages 1253-1255)

(ii) SIA-10 Internal Audit Evidence (Pages 1256-1257)

(iii) SIA-11 Consideration of Fraud in an Internal Audit (Pages 1257-1259)

B. Exposure Drafts on Standards on Internal Audit (SIA) :

i) SIA – Using the Work of an Expert (Pages 1286-1287)

ii) SIA- Internal Audit in an Information Technology Environment (Pages 1288-1292)

iii) SIA – Knowledge of the Entity and its Environment (Pages 1292-1294)

6. Auditing Standards and Exposure Drafts:

(Note: Page Nos. below are from c.A. Journal for January,2009)

A. Standards on Auditing (SA) :
(i) SA-230 (Revised) – Audit Documentation (Pages 1260-1265)
(ii) SA-560 (Revised) – Subsequent Events (Pages 1266-1271)

B. Exposure Drafts of Standards on Auditing (SA) :
(i) SA-320 (Revised) – Materiality in Planning and Performing an Audit (Pages 1272-1276)
(ii) SA-450 – Evaluation of Misstatement Identified During the Audit (Pages 1277-1281)
(iii) SA-610 (Revised) – Using the Work of Internal Auditors (Pages 1282-1285)

7. ICAI News:

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

i) Enhancing Audit Quality:

Some observations made by Financial Reporting Review Board are listed in order to enable members to improve the quality of audit of corporate bodies. These observations relate to major non-compliances relating to :

AS-18 Related Party Disclosures
AS-19 Leases
AS-20 Earnings per Share
AS-22 Accounting for Taxes on Income
AS-26 Intangible Assets
AS-28 Impairment of Assets (Page 1226)

ii) ICAI to be XBRL Indian Jurisdiction

The Institute has been assigned the Indian jurisdiction of XBRL (eXtensible Business Reporting Language) International. Consequently, the Institute will be the Indian entity which will encourage the development and adoption of XBRL in India and will represent the Indian interest at this international level. The Ministry of Corporate Affairs and the various regulators, namely, RBI, SEBI and IRDA are part of the group constituted by the ICAI and are supporting the Institute in this initiative. XBRL is a novel way of communication of business and financial data that is of immense utility to governments, regulators, stakeholders, etc.

iii) Exclusive T.V. Channel for learning:

The Institute is launching an exclusive TV channel dedicated to learning. This channel will greatly boost the ICAl’s credentials as a pioneer in teaching through the distance education mode. This channel will make quality accountancy education accessible to interested students in the country, and will particularly cater to the needs of the students hailing from lower strata of society. This will also help in conducting CPE programmes on a regular basis. These programmes will also be accessible even in remote/far-flung areas of the country.

iv) New ICAI Secretary:

Shri T. Karthikeyan who joined ICAI in 1978 has been appointed as Secretary of the Institute. He has worked in the Institute in various capacities during the last 30 years and gained popularity with the staff, students and members of the Institute by his efficient and dedicated work. In particular, he has thorough knowledge about the CA. Act and Regulations as well as disciplinary cases. We wish him successful term of office as Secretary of the Institute.

v) ICAI Publications:

a) Implementations Guide to SQC-l (Page 1152)
b) Handbook on Foreign Trade Policy and Guide to Export and Import (Page 1242).

ICAI And Its Members

ICAI and its Members

1.
Companies Bill, 2009 — Accounts and Audit :

Companies Bill, 2009, was
introduced in the Parliament on 3-8-2009. It was referred to the Standing
Committee for Finance on 9-9-2009. The Report of the Finance Committee dated
26-8-2010 was presented to the Parliament on 31-8-2010. Based on this report the
Companies Bill is being modified by the Ministry of Corporate Affairs. The
modified Bill is likely to be discussed and adopted by the Parliament in the
Budget Session in February-May 2011. Some important changes, relating to
accounts and audit, as suggested by this Committee, are as under.

(i) Clause 117(3) of the
Bill provides that the accounts of subsidiary companies should be consolidated
in cases of all companies. The committee has suggested that unlisted companies
be exempted from this requirement.

(ii) Clause 118 of the Bill
provides that the Central Government shall constitute ‘National Advisory
Committee on Accounting and Auditing Standards’ (NACAAS) to advise the
Government on accounting and auditing polices and standards for adoption. The
committee has welcomed this provision and observed that NACAAS should be
institutionalised not only as a body for setting up auditing standards, but also
as a quasi-regulatory body for generally supervising the quality of audit
undertaken. Under clause 126(10), the Central Govt. has been given authority to
notify the auditing standards in consultation with NACAAS and the auditors will
have to comply with these standards. This provision, if implemented, will
restrict the authority of ICAI to issue the auditing standards.

(iii) The committee has
suggested that a new clause be added in the Bill to provide for appointment of a
Chartered Accountant or a Cost Accountant for conducting Internal Audit of the
books of accounts of specified classes of companies. The Government should
prescribe the Rules about the manner in which Internal Audit should be conducted
and reported.

(iv) Clause 123 of the Bill
provides that a company shall appoint an individual or a firm as an auditor at
the annual general meeting. The committee, in its report, has suggested the
following far-reaching changes in this clause, which will affect the entire
auditing profession :

(a) An individual Chartered Accountant or a firm of Chartered Accountants shall be appointed as auditor for not more than five consecutive years.

(b) An Individual auditor who has completed a five year term, shall not be reappointed as auditor for the next three years in that company.

(c) A firm of auditors who has completed a five years’ term, shall not be reappointed as auditor in the same company for the next five years.

(d) In the case of the firm, being auditor of a company, the auditing partner should be rotated every three years. The auditing partner rotated, as above, shall not be eligible to be the auditing partner for audit of the same company for the next three years.

(e) NACAAS should be entrusted to develop and prepare a comprehensive list of audit firms over a period of three years. Once this list is ready, it will be mandatory for any company to appoint an auditor from this list only. During this interim period, companies can appoint their auditors on their own.

(v) The Audit Committee has
to ensure and monitor that the independence criteria has been fulfilled by the
auditor of the company throughout the year.

(vi) The auditor who has
resigned or is proposed to be removed before the expiry of his term will have to
file with the company and the ROC the prescribed form giving reasons and other
relevant facts. The matter about resignation or removal of the auditor, with
reasons recorded by him, will have to be first considered by the Audit
Committee. The Board of Directors shall consider the recommendation of the Audit
Committee, and thereafter, with the approval of the General Meeting accept the
resignation of the auditor and appoint another auditor. In case of removal of
auditor, before expiry of his term, special resolution of General Meeting will
be required.

(vii) Clause 125 of the Bill
provides for remuneration of Auditors. It is suggested by the committee that the
notice for the General Meeting shall give justification for payment of the
amount of remuneration proposed. Further, the shareholders, while approving the
remuneration of Auditors, will have to take into consideration the net worth and
turnover of the company. If this suggestion is implemented, the present practice
in some companies to provide in the resolution that the audit fees payable to
Auditors will be fixed by the Board of Directors will have to be discontinued.

(viii) Clause 127 of the
Bill provides that a statutory Auditor of the company shall not render any other
services viz. (i) Accounting, cost accounting and book keeping, (ii) Internal
Audit, (iii) Design and implementation of any financial and cost information
system, (iv) Acturial services, (v) Investment advisory services, (vi)
Investment banking services, (vii) Rendering of outsourced financial services
and (viii) Management services. As regards other services, relating to tax
audit, tax representation, tax advisory services, etc. approval of Board of
Directors or Audit Committee will be required. The committee has suggested that
the statutory auditor of holding company also should not render the above
services listed in Clause 127 to a subsidiary company.

(ix) The committee has
suggested that Secretarial audit report should be attached to the financial
statements by companies exceeding certain threshold limit of paid-up share
capital.

(x) Clause 130 of the Bill,
after suggestion of the committee, provides for the following punishment for
contravention of certain provisions by the Auditors :

(a) If the auditor contravenes the provisions of Clauses 126, 127 and 128 dealing with powers and duties of auditors and compliance with auditing standards, rendering other services and signing of audit report, he shall be punishable with imprisonment for a term up to one year and with fine ranging from Rs.50,000 to Rs.25 lacs or with both.

(b) On conviction as above, the auditor will be liable to refund the remuneration received by him to the company and also pay damages for loss arising out of incorrect or misleading statements in the audit report.

(c) In the case of audit by a firm, if it is proved that the audit partner or partners have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, or by, the company or its directors or officers, the civil or criminal liability in any law shall be of the audit partner or partners as well as the firm jointly and severally.

(xi) As regards cost audit, the committee has suggested that Clause 131 of the Bill should be suitably amended and a Cost Auditor should be appointed by the shareholders at the AGM in the same manner as statutory auditors.

Some of the above suggestions of the committee, if accepted by the Government and enacted by the Parliament, will have far-reaching consequences on the practising members of our profession. Some of the provisions undermine the autonomy of our Institute granted to us six decades ago. It is surprising that no serious protest has been made by our Institute or the elected representatives in the Council. No public debate has been generated and our members are not aware about the implications of these far-reaching changes likely to be made in the company law in the next year.

2. Special Loan Scheme of Corporation Bank for our Members:

The Committee for Capacity Building of CA Firms and Small & Medium Practitioners, ICAI, has taken a major initiative to arrange financial assistance to all members in practice/firms in the form of specially designed loan scheme through Corporation Bank. Under this scheme, eligible Chartered Accountants can avail finance for setting up offices, including cost of furniture/ fixture/office equipments — computers and other accessories. The scheme would also enable Chartered Accountants to finance a part of working capital for building their profession and would also take care of the needs of fresher (CAs with experience below three years).

Members and firms are requested to avail the benefits of this loan scheme. For further details, please contact the nearest branch of Corporation Bank.

3. Special programme through video conferencing mode:

The Committee for Members in industry of the Institute of Chartered Accountants of India provides opportunity to employers to interact with newly qualified Chartered Accountants providing a cost effective mode of recruiting newly qualified Chartered Accountants.

Special placement programme is a step ahead as an extension to the same programme, but with a different objective. For the first time, CMII has taken an initiative to organise a separate special placement programme through video conferencing mode for Chartered Accountants for getting placed, not only within the country, but also for taking up jobs abroad. Many CAs are providing their services to organisations in Gulf Council Countries/Middle East. To facilitate employment of Chartered Accountants in the GCC/Middle East, CMII of ICAI is organising a special placement programme.

This programme would enable corporates working in Gulf Council countries (GCC)/Middle East to recruit Chartered Accountants through video conferencing mode from Chennai, Kolkata, Mumbai and New Delhi centres. (Refer P. 807 of C.A. Journal for November, 2010).

4. Online Articles Placement Portal:

The Board of Studies has introduced an optional campus placement scheme for selection of Articled Assistants by CA firms. The pilot campus placement programme was held in Delhi in August 2010 for the CA firms having their HOs/Branch Offices in Delhi/New Delhi and for eligible students who would like to service their articles in CA firms in Delhi/ New Delhi. Considering the good response, positive feedback and requests received from both CA firms and students, it has been decided to start an Online Articles Placement Portal — http://bosapp.icai. org from 5th October, 2010 to facilitate placement of Articles in CA firms on an all-India basis. Eligible candidates and CA firms can avail of this facility and register themselves online through the portal. The candidates shortlisted by CA firms would be informed by email through the portal, to appear for interviews/interactions at their respective offices, on the designated date and time. (Refer P. 690 of C.A. Journal for November, 2010).

ICAI And Its Members

1. Disciplinary case :

In the case of ICAI v. Shri R. K. Tayal, the Bank had complained that it had sanctioned loan of Rs.630 lacs to one of its clients (Company) for its expansion- cummodernisation project. As per the terms and conditions of the sanction, the Company was to bring about Rs.135 lacs by way of promoter’s contribution. While requesting for disbursement of the sanctioned amount, the Company stated that it had already spent Rs.147.21 lacs for the project and, in support of this, it submitted a certificate from the member. In this certificate it was stated that the Company had already spent Rs.147.21 lacs for the project. Based on this certificate the Bank disbursed loan of Rs.315 lacs. In the above certificate the member had stated that certain payments were made which was found to be not correct. Hence, the Complainant Bank alleged that the member had not verified the records properly before issue of the certificate and that the said certificate did not mention about the end use of the funds.

The Disciplinary Committee, after examining the evidence, submitted a report to the Council that the member was guilty of professional misconduct under clauses (5) to (8) of Part I of Second Schedule to CA Act (Gross negligence in performance of professional duty). This finding was accepted by the Council and it recommended to the High Court that the name of the member be removed from the Register of Members for 3 months.

In its judgment, the Delhi High Court has held that the member was grossly negligent in his professional duties in giving the certificate to the Bank without proper verification of the records. The High Court observed that the lack of responsibility displayed by the member clearly showed that he had acted in a manner unbecoming of a Chartered Accountant. The High Court further observed that there has to be some degree of integrity and probity which is expected of a Chartered Accountant who is regularly concerned with the financial transactions and on the basis of whose recommendations and certificates, financial institutions, banks, etc. disburse loans or enter into other financial transactions. With these observations the High Court has accepted the recommendation of the Council to remove the name of the member from the Register of Members for 3 months (Refer page 737-738 of CA Journal for November, 2009).

2. Some ethical issues :

The Ethical Standards Committee of ICAI has issued the following clarifications on some ethical issues in the form of questions and answers for the benefit of members.

(i) Q. Can a Chartered Accountant in practice accept original professional work emanating from the client introduced to him by another member ?

Ans. : 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.

(ii) Q. Can a member in practice solicit clients or professional work by advertisement ?

Ans. : The CA Act prohibits a member in practice 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 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, or 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/Newsletter of the Institute intended to give information for sharing professional work on assignment basis or for seeking professional work on partnership 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.

(iii) Q. Whether sponsorship or prizes can be instituted in the name of Chartered Accountants’ firms ?

Ans. : As per the CA Act it is not objectionable to institute prizes in the name of the individual Chartered Accountant and also in the firm’s name provided the designation ‘Chartered Accountant’, is not indicated in the prize and the clause relating to advertisements and publicity are complied with.

(iv) Q. 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 ?

Ans. : 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 members or their firms are not given in a manner highlighting their professional attainments, which may hit clauses (6) and (7) of the First Schedule of the CA Act.

(Refer Page 718 of CA Journal for November 2009)

3. ICAI accounts :

The Council has adopted audited accounts of ICAI for the year 2008-09 on 25-9-2009. Some salient features of the accounts are as under :

4. EAC opinion:

The Expert Advisory Committee (EAC) of ICAI has recently given an opinion on accounting for business of manufacture, erection and commissioning of Wind Electric Generators (WEGs).

The company based on negotiation prepares three separate purchase/works orders viz. (a) purchase order for supply of WEGs (b) work order for civil, electrical and infrastructure work and (c) order for erection and commissioning of WEGs. The company recognises revenue based on the completion of an activity covered in the aforementioned three purchase/works order separately.

The EAC of lCAl is of the view that the three sepa-rate contracts entered into by the company with its customers are in fact one composite contract which has been broken into three separate agreements.

Further, the committee noted that the performance in respect of sale of WEGs is not complete until the commissioning of WEGs and commissioning is an essence of the contract. Therefore, the company can not adopt the policy on revenue recognition independently for the three orders as these form part of the single composite contract. Hence, the company should recognise revenue only on commissioning of the WEGs.

[Pleaseseepage nos. 739 to 741 of c.A. Journal for November, 2009.]

5. Standards on Auditing – Exposure Drafts:

The following Exposure Drafts are published by lCAl for comments of members. Page Nos. given below are from CA Journal for November, 2009 :

i. Standard on Auditing (SA) 220 (Revised)

Quality Control for Audit of Financial Statements (P. 820)

ii. Standard on Auditing (SA) 501 (Revised)

Audit Evidence – Specific Consideration for Selected Items (P. 826)

iii. Standard on Auditing (SA) 505 (Revised)

Analytical Procedures (P. 830)

iv. Standard on Auditing (SA) 505 (Revised)

External Confirmations (P. 834)

v. Standard on Auditing (SA) 620 (Revised)

Using the Work of Auditors Expert (P. 840)

8. New publications by ICAI :

Details of the following publications are given on P. 811 of CA Journal for November, 2009:

i) Data Analysis of Auditors – Practical Case Studies on using CAATS

ii) XBRL – Primer

ICAI And Its Members

ICAI and Its Members

1. Disciplinary case :

In the case of ICAI v. P. V. Mehta the Department of
Customs, Government of India, filed a complaint against the member. It was
alleged that the member had issued a false certificate about export performance
by two concerns. On the basis of such certificates the parties obtained import
licences, effected imports and cleared the goods imported free of duty. The
matter was investigated by the Disciplinary Committee which found that the
member was grossly negligent in the discharge of his professional duties under
clause (7) of Part I of the second schedule of the C.A. Act. The Council, after
accepting the above report, decided to recommend to the Bombay High Court for
removal of the name of the member for one month.

The Bombay High Court has accepted the recommendation of the
Council. The High Court has observed that the member has admitted that he did
not verify the books or the relevant records or documents as also the figures of
turnover of the two concerns. The member admitted that he had signed the export
performance certificates prepared by the Internal Auditor who was also a member
of the Institute. The High Court, after considering the facts of the case,
accepted the finding of the Disciplinary Committee and the Council and confirmed
the punishment of removal of the name of the member for one month (Refer page
831 of C.A. Journal for November, 2008).

2. EAC opinion :

The Expert Advisory Committee (EAC) of ICAI has considered
the question of valuation of investment in shares of a subsidiary company for
non-cash consideration on pages 788-790 of C.A. Journal for November, 2008. In
this case a State Government company (ABC Ltd.) engaged in mining and selling of
rock phosphate, gypsum, etc. received an ‘in-principle approval’ from the
Government of India for allocating coal blocks in certain Lignite mines to the
company. For this purpose, ABC Ltd. was required to form a separate company to
undertake this mining activity. The company entered into a joint venture with a
private sector company and decided to form one JVC Ltd. It was agreed between
the parties that JVC Ltd. will be a subsidiary of ABC Ltd. in which it will hold
51% share capital, and private sector company will hold 49% share capital.

JVC Ltd. issued certain shares to ABC Ltd. for which no
payment was made by ABC Ltd. In the J.V. agreement it was provided that ABC Ltd.
will obtain licences, approvals, etc. and will also contribute its local
knowledge, technical knowledge and other expertise in relation to the mines. JVC
Ltd. was required to allot equity shares carrying 51% voting right to ABC Ltd.
for which no payment was to be made. The private sector company was to hold 49%
shares, arrange entire investment and also provide management support.

ABC Ltd., on allotment of 51% shares in JVC Ltd., debited
face value of shares to Investment A/c. and credited the amount to Capital
Reserve A/c. The amount debited to Investment A/c. was shown by ABC Ltd. under
the head ‘Investments’ in the balance sheet. The Auditors qualified the audit
report by stating that this should have been valued at ‘Nil’ as no payment was
made. According to the Auditors, assets of ABC Ltd. were stated at a higher
figure to this extent.

The EAC has examined the issue on the basis of paras 28/29 of
AS-13 ‘Accounting for Investments’ and given the opinion that the correct
accounting treatment in the books of ABC Ltd. for shares of JVC Ltd. issued/to
be issued in future to ABC Ltd. would be to recognise the same at fair value of
the services and licence to be provided by ABC Ltd. to JVC Ltd. Whether ABC Ltd.
has made actual payment or not is not material. In this case, consideration is
in kind and, therefore, valuation of investment in JVC Ltd. should be made as
explained in para 28/29 of AS-13.

3. Companies Bill — 2008 :

Companies Bill, 2008, has been introduced by the Minister of
Company Affairs in Lok Sabha on 22nd October, 2008. This Bill contains 426
sections and there are no schedules. This Bill, when enacted, will replace the
existing Companies Act, 1956.

4. Limited Liability Partnership (LLP) :

Limited Liability Partnership Bill (LLP Bill) providing for
establishment of Limited Liability Partnerships (LLP) in our country was
introduced in the Rajya Sabha by the Minister of Company Affairs on 15th
December 2006. This Bill was referred to the Parliamentary Standing Committee.
This committee’s report was presented to Lok Sabha and Rajya Sabha on 27th
November 2007. Based on the report of the committee some changes were made in
the original Bill. The revised LLP Bill, 2008 was presented to Rajya Sabha on
21st October 2008, and passed by Rajya Sabha in October, 2008. It will now be
placed before the Lok Sabha in December and may, hopefully, be passed before the
end of the current year. It may be noted that the basic structure proposed in
LLP Bill, 2006, has been retained in LLP Bill, 2008. Some changes are made in
the original Bill, which are of procedural nature. Concept of LLP is accepted in
USA, U.K., Australia and other countries. The new Bill, when enacted, will
provide for an alternative corporate business vehicle that provides the benefits
of limited liability and allows its members the flexibility of organising their
internal structure as a partnership based on a mutually arrived agreement. This
enactment will come into force on the date to be notified by the Central
Government after the Bill is passed by the Parliament. Salient features of
revised LLP Bill are as under :

i) Any two or more persons can form LLP for the purpose of carrying on any business, trade, profession, service or occupation. Even a limited company, an LLP, Non-resident, foreign LLP/Company can be a partner in LLP.

ii) Every LLP has to have at least two designated partners, at least one of whom should be a resident Indian. Designated partners shall be responsible for compliance with all legal requirements of the LLP Act, Rules and other Laws.

iii) LLP has to get itself registered with the Registrar of Companies (ROC) by filing the pre-scribed form of incorporation document and on payment of the prescribed fees. The incorporation document is to be accompanied by a statement about legal compliance signed by an advocate, a chartered accountant, a company secretary or a cost accountant.

iv) Upon incorporation, LLP will be treated as a body corporate and will be considered as a legal entity separate from its partners. It shall have a common seal and perpetual succession.

v) The procedure for obtaining name of LLP is the same as in the Companies Act. For this purpose, the name has to be approved by ROC.

vi) The limit of 20 partners (for business or profession) and 10 partners (for banking business) which applies to partnerships will not apply to LLP. It will be possible for Chartered Accountants to form LLP for rendering management consultancy service and there can be more than 20 partners in such LLP.

vii) Upon incorporation of LLP, its partners will have to enter into a partnership agreement in writing, stating capital contribution of each partner, share of each partner in profits and losses, interest/remuneration payable to each partner and other rights and duties of partners of LLP. The agreement is to be filed with ROC. If no such agreement is executed, the relationship between the partners shall be governed by the provisions of the First Schedule to the LLP Act.

viii) Agreement is to be executed when there are changes in partners or there are changes in the terms and conditions of the partnership. Such agreement is also to be filed with the ROC.

ix) Every partner of LLP is an agent of LLP.How-ever, he is not an agent of other partners. The liability of each partner is limited to the extent of his contribution as specified in the partnership agreement. The liability of LLP is limited to the extent of its assets.

x) LLP has to maintain its books of accounts either on cash or on accrual basis. Such accounts have to be audited every year in such manner as may be provided by the rules. LLP has to file audited statements with a solvency statement with ROC within six months of close of financial year (i.e., on or before 30th September). It has also to file an annual return with ROC in the prescribed form within 60 days of close of Financial Year (i.e., 31st May).

xi) Any existing partnership can be converted into LLP by complying with the procedure laid down in the Second Schedule to the Bill.

xii) Similarly, a Private Limited Company or a Public unlisted company can also convert it-self into LLP by following the procedure laid down in the Third/Fourth Schedule to the Bill.

xiii) The Central Government is authorised to frame rules providing for procedure to wind up a LLP.

xiv) ROC is empowered to collect fees for filing documents with him and for levying penalties for defaults on the part of LLP. The Central Government is authorised to frame rules for administration of LLP Act.

xv) The National Company Law Tribunal is given powers to sanction arrangement, reconstruction, mergers, demergers, compromise with creditors, etc.

xvi) LLP Bill, 2008 is divided into 14 chapters and contains 81 sections and four schedules. The Central Government has power to alter any of the schedules.

xvii) The LLP Bill does not deal with tax aspects of LLP. The Income-tax Act will have to be amended for this purpose. It is likely that LLP will be considered as ‘Firm’ and all the provisions of the Income-tax Act applicable to Firms will apply to LLP. We have to await the amendments in this respect in the forthcoming Budget.

Standards on Auditing (SA) :

The following Exposure Drafts are published for comments in November, 2008, CA. Journal at pages stated below:

i) ‘Agreeing the Terms of Audit Engagements’ SA-210 (Revised) together with Explanatory Memorandum (Pages 912-924).

ii) “The Auditors’ Responsibility in Relation to Other Information in Documents containing Audited Financial Statements” SA-720 together with Explanatory Memorandum (Pages 925-930).

6. ICAI News:

(Note: Page Nos. given below are from CA. Journal for November,2008)

(i) New Certificate courses for members (Page 768):

Following two certificate courses are started for members:

(a) Forex and Treasury Management – This course covers the areas of foreign exchange market, money market, bond market operations and related financial products.

b) Derivatives – This course covers financial derivatives such as forward contracts, futures contracts, options, swaps and other new derivatives.

i) Enhancing Audit Quality:

Some observations made by reviewers while conducting peer review are listed in order to enable members to improve the quality of audit of corporate bodies. These observations relate to training programmes for staff (including articled and audit assistants) concerned with attestation function, including appropriate infrastructure (Page 910).

ii) ICAI – New Branch:

ICAI has opened a new branch in “Beawar” (CIRC) w.e.f. 5-10-2008 (Page 890).

iii) New Publication of ICAI :

Implementation Guide to Risk-based Audit of Financial Statements – (Page 892).

ICAI And Its Members

ICAI and Its Members

1. ICAI News :

(Note : Page Nos. given below are from C.A. Journal
for July, 2010)

(i) Invitation to join CFO Guild/Members in Industry
Guild :

The Committee for Members in Industry of ICAI has invited
members of the ICAS to join two guilds.

1. CFOs Guild (Corporate Accountants Guild) :

This guild is for members who are occupying high positions
(CEO/CFO/Treasury Head/Head of Analyst, GM or above) in industry. The primary
objective of setting up such a guild is to develop a platform where highly
intellectual and talented pool of people from various organisations can discuss
various issues concerning the profession in general and Members in Industry in
particular.

2. Members in Industry Guild :

Members in Industry Guild is for Members serving in
Industries. The primary objective of setting up such a guild is to develop and
maintain an industrywise database of the members of our Institute serving in
industries.

They can plan, formulate and strategise policies for
improving the image of Chartered Accountants in the eyes of the industry.
Industry-specific seminars/conferences/round table meetings can also be
organised to discuss the matters pertaining to the industry and make them the
brand ambassadors of the profession. The Members shall also be appraised of the
various happenings of the Institute, from time to time.

(ii) Formation of CPE Study Circles for Members in
Industry of ICAI :

29 CPE Study Circles for Members in Industry have already
been formed so far by the CMII. A separate helpline for forming CPE Study for
Members in Industry has been established at the Headquarters of our Institute
with Email : cmii_events@icai.in.

(iii) Retention of period of audit documentation :

The Council of the Institute of Chartered Accountants of
India had in August 2009, pursuant to the provisions of Rule 12 of the Chartered
Accountants (Procedures of Investigations of Professional and Other Misconduct
and Cases) Rules, 2007 had amended the audit documentation retention period
appearing as ten years in paragraph 83 of Standard on Quality Control 1 to seven
years.

(iv) For the attention of the candidates who aspire to
appear in various Chartered Accountancy (CA) examinations scheduled during
November, 2010 :

In order to reduce the time taken in processing the OMR
application forms and also to ensure accuracy in the data pertaining to name,
registration No., group/centre/medium opted, it has been decided to make the
filing of examination application forms online at the url http://icaiexam.icai.org/
as the only mode of application for various CA examinations with effect from
May, 2011.

(v) Invitation for articles on XBRL :

To create awareness about XBRL by developing a pool of
knowledge and sharing it, ICAI invites articles on XBRL from members and others
with knowledge/experience in XBRL for publishing in the Chartered Accountant
Journal. Articles may pertain to relevant topics such as basics of XBRL; its
benefits and uses to various users, such as chartered accountants, banks,
income-tax department, financial analysts and others; challenges in implementing
XBRL, etc.

(vi) Recognition to profession :

Our member CA Piyush Goel has been elected to Rajya Sabha
from Maharashtra recently, and our Past President Kamlesh Vikamsey has been
appointed as the Member of Audit Advisory Committee of United Nations
Development Programme. Our heartiest congratulations to them.

(vii) Non-submission of Form 112 :

The following course of action be adopted for dealing with
the cases of condonation of Regulation 65 w.e.f. 1st April, 2010.

It is clarified that the cases for condonation of breach of
Regulation 65 and 78 received up to 31st March, 2010 would be dealt with in
terms of the Announcement dated 8th January, 2010 i.e., general amnesty.

In case a breach of regulation 65 is noticed at the time of
enrolment as a member, the decisions are as follows:

(viii) ICAI publications :

The Committee on Public Finance and Government Accounting is
coming out with a publication ‘Issues on Public Finance’.

(see pages 200 to 203)

2. Transfer price for the purpose of segment reporting (EAC
Opinion) :

Facts :

A company is a public sector enterprise under the
administrative control of the Ministry of Mines, Government of India and is
engaged in mining of bauxite, manufacturing of alumina and aluminum, generation
of power at a captive power plant for use in smelter, and selling of alumina and
aluminum both in domestic and international market.

Cost of power constitutes about 30% of cost of production of
aluminum. The captive power plant is set up exclusively to supply uninterrupted
power to smelter. It is also connected to State grid to take care of the supply
of emergency power to smelter in case of any breakdown or failure at the captive
power plant. Any surplus power after meeting the requirement of smelter is
automatically transmitted to State grid and treated as sale, as per agreement
with company ‘G’, which is a State Government undertaking.

As per the querist, even though the cost of generation of
power is higher, transfer price of power of the purpose of segment reporting is
considered only at 110 paise/kwh, which results in segment loss in case of the
captive power plant (even though the unit is functioning efficiently and up to
the satisfaction of the management) and higher revenue for chemical and aluminum
segments.

Segment report for the quarter ended December 31, 2008 was
examined by the statutory auditors at the time of limited review and they were
of the opinion that though the unit is performing well, as a result of
compliance with the provisions of AS-17 for inter-segment transfers, as stated
hereinbefore, the power segment reveals loss, which does not appear to be a
proper disclosure.

As per the querist, in case the company is allowed to sell
power to parties other than company ‘G’, revenue earned will be at least three
to four time more. However, since the company is largely dependent upon company
‘G’ for emergency power and back-up power, it will not be practicable to delink
from company ‘G’.

From the aforesaid facts, according to the querist, it is
revealed that the circumstances have arisen only because of non-remunerative
sale price and will continue to be the same till the rate charged from company
‘G’ is revised.

Query :

The querist has sought the opinion of the Expert Advisory Committee as to whether in the circumstances explained above, the loss disclosed in the segment report can be explained by way of giving a note with reference to the provision of Accounting Standard or whether any other formula for transfer pricing can be adopted, which may necessitate revision of AS-17 ?

The Committee noted that the basic issue raised by the querist relates to pricing of inter-segment transfers for segment reporting under Accounting Standard (AS-17) Segment Reporting.

The Committee observed that inter-segment transfer pricing is an accounting policy which relates specifically to segment reporting and that inter-segment transfers should be measured on the basis of the enterprise actually used to price those transfers. In other words, the price that is actually used in the books of accounts to reflect the transactions between different segments and the price that is used to reflect segment results for the purpose of segment reporting under AS-17, should be the same. The Committee further observed that AS-17 neither requires nor recommends that inter-segment transfers should be priced in any particular manner, such as competitive markets prices charged to unaffiliated customers for similar goods as stated by the querist.

EAC opinion :

On the basis of the above, the Committee is of the opinion that the company is free to choose any appropriate pricing policy for inter-segment transfers. Thus, the question of explanation of the loss with reference to any provision/requirements of AS-17, if the existing policy of transfer pricing is continued to be followed, by way of a note to the segment report, does not arise. However, if the company chooses, the loss may be explained by way of a note to the segment report, the note should not state that AS-17 requires adoption of that particular pricing policy. Further, revision to AS-17 with respect to the issue raised by the querist is not required.

(see pages 183 to 185)

ICAI And Its Members

1. Disciplinary case :

In the case of ICAI v. Shri Basab Kumar Sarkar, (C.A. Journal, July, 2009, P. 99) the Bank of Baroda had filed a complaint against the member alleging that the member had misappropriated the funds of its client. According to the Bank, the member opened an SB A/c. (No. 7831) with one of its branches. After some time, the member added the name of his client in the above account as a joint account holder without his client’s knowledge. His client had a separate account in the same branch of the Bank. When its client gave 14 cheques of Rs.22.11 lacs to the member for depositing these cheques in his A/c., the member deposited these cheques in his A/c. 7831 and withdrew the funds. Similarly, certain FDRs of Rs.5 lacs belonging to its client were also used by the member to take loan from the bank and this money was misappropriated by him.

The Disciplinary Committee found the member guilty of ‘Other Misconduct’. The Council of ICAI accepted this finding and recommended to the High Court to remove the name of the member from the Register for 3 months. The Kolkata High Court, in its order, observed that the member had not co-operated during the course of inquiry. The member did not make any submissions before the High Court. Considering the facts of the case, the High Court has accepted the above finding of the Council and ordered that the name of the member be re-moved from the Register of Members for 3 months.

2. Provision for LTC benefits :

A Government company was accounting expenditure on leave travel concession (LTC) to employees in the year of availment of leave due to uncertainties in accrual.

The Expert Advisory Committee has given an opinion that ‘accrual’ being one of the fundamental accounting assumptions, the cost of providing benefits to employees in return for the services rendered by them in an accounting period should be accounted for in that period. AS-15 (revised) 2005 recognizes that the liability towards employee benefits should be provided as and when the services are rendered. Further, this falls in the category of ‘other long term employee benefits’. As per AS-15, LTC benefits should be measured on actuarial basis using the Projected Unit Credit Method. The actuarial basis of valuation takes into account various uncertainties. Therefore, the method adopted by the company was not in compliance with the existing Accounting Standard and the standard accounting principles. (Please refer Pages 136 to 137 of C.A. Journal of July, 2009]

3. Enhancing Audit Quality :

Financial Reporting Review Board (FRRB) has made certain observations about non-compliance in the published financial statements and Auditor’s Report on P. 138-139 of C.A. Journal, July, 2009. These observations are made on review of the published financial statements with a view that the audit quality is enhanced. These observations are as under :

(i) AS-20 — Earnings per share :

(a) Some enterprises disclose the numerators and denominators used in calculating basic and diluted earnings per share. However, they do not disclose the reconciliation between the two denominators which is not in accordance with AS-20.

(b) In some cases, the enterprises are not considering the weighted average number of equity shares outstanding during the period. This is not in accordance with AS-20.

(c) In some cases, the enterprises determining the weighted average number of equity shares outstanding during the period considering the number of equity shares as at the beginning and at the end of the year without adjusting the same for the effects of all dilutive potential equity shares.

(ii) AAS-28 — The Auditor’s Report on Financial Statements :

In some cases the auditor/partner of Audit Firm does not give his Membership Number. This is in contravention of AAS-28.

(iii) CARO Report :

(a) In some cases the auditors do not report on the second part of para 4(iv) which requires the auditor to state whether there is a continuing failure to correct major weaknesses in internal control system.

(b) In some cases it was noticed that CARO report is addressed to directors whereas it is required to be addressed to the members.

4. Secondment of articled assistants :

It is possible to send an articled assistant to another member entitled to train articled assistants for an aggregate period of one year during the period of articleship. The following Rules for this purpose are given on P. 150 of C.A. Journal, July, 2009.

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

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

(iii) The member to whom the articled assistant is seconded will not be entitled to train more than two such assistants on secondment at a time.

(iv)(a) The maximum period of secondment shall be one year which may be served with a single eligible member.

(b) The Council may permit secondment with more than one such member provided the minimum period of secondment shall be four months and the aggregate period served on secondment with such members shall not exceed one year.

(v) Where an articled assistant is seconded to a member in industry, the total period spent in industry by the articled assistant, including the period of industrial training under the Regulations, shall not exceed one year.

(vi) During the period of secondment, the member with whom the articled assistant is seconded shall pay the stipend as provided under the Regulations.

(vii) The member with whom the articled assistant is seconded shall be responsible for imparting training during secondment. He shall maintain records of practical training undergone by the articled assistant during secondment and forward the same to the principal on completion of period of secondment. The principal shall include required particulars in the report to the Council under Regulation 64.

viii) A statement in the form approved by the Council shall be sent to the Secretary for records within thirty days from the date of commencement of training on secondment.

5. Accounting and Internal Audit Standards:

i) Exposure Draft of AS-16 :

Borrowing Costs (Revised) has been published by ICAI for comments before 10th August. There is no major difference between the revised AS-16 and IAS-23 except in respect of application of the standard to borrowing costs that are directly attributed to the acquisition, construction or production of inventories that are manufactured or otherwise produced in large qualities on a repetitive basis. (Refer P.155 of CA. Journal, July, 2009).

ii) Exposure Draft of Standard Internal Audit (SIA) :

This standard deals with ‘Consideration of Laws and Regulations in an Internal Audit’. This standard deals with Internal Auditor’s responsibility to consider laws and regulations when performing an Internal Audit or such other review exercise with the objective of providing assurance thereon. The draft is published on pages 168-173 of CA. Journal of July, 2009.

6. Accounts and Audit of Limited Liability Partnership (LLP) :

LLP Act and Rules have now come into force from 1-4-2009. The Sections relating to conversion of firms and private and public unlisted Companies into LLP have also come into force from 31-5-2009. The Finance (No. 2) Act, 2009, recently enacted, provides that LLP will have to pay tax under the Income-tax Act in the same manner as a Firm. Therefore, LLP will not be required to pay MAT, Dividend Distribution or Wealth tax. The provisions relating to accounts and audit of LLP are as under:

i) U / s.34 of the LLP Act, an LLP has to maintain the books of accounts as prescribed in Rule 24. Such books may be maintained either on cash basis or accrual basis of accounting.

ii) LLP has to follow accounting year from April to March only. It cannot choose any other accounting year.

iii) Rule 24 provides that the above books of accounts should be preserved for 8 years.

iv) The above accounts have to be audited by Chartered Accountant(s) if the turnover of LLP exceeds Rs.40 lacs or the contribution by the partners exceeds Rs.25 lacs.

v) The designated partners of LLP or the partners shall appoint an auditor or auditors as under:

For first financial year before the end of the year.
For subsequent years, atleast 30 days before the end of the year.
For filling up the casual vacancy in the office of the auditor.
For filling up the vacancy caused by removal of an auditor.

vi) The auditor appointed as above shall hold office for the financial year for which he is appointed. He shall hold such office till any other person is appointed as auditor.

vii) The partners of LLP can remove an auditor from his office at any time by following the procedure in LLP agreement.

viii) An auditor of LLP can resign by giving notice to LLP. If he does not want to be reappointed he shall give atleast 14 days notice.

ix) The remuneration of the auditor may be fixed by the designated partners of LLP or by fol-lowing the procedure laid down by the LLP Agreement.

x) LLP has to get the accounts audited each year on or before 30th September and file Statement of Account and Solvency in Form No. 8 with ROC on or before 31st October with the pre-scribed fee. LLP is also required to file Annual Return in Form No. 11 with ROC with pre-scribed fee within 60 days of the close of the financial year (i.e., before 31st May).

xi) The LLP Act or Rules do not prescribe the form of profit & loss A/c. and balance sheet or the form of audit report which the auditor has to give. Therefore, ICAI will have to recommend these forms for the guidance of our members. Form No. 8 provides for information to be given to ROC about assets, liabilities, income and expenditure. It also states that auditor will have to give a certificate in the following form.

“It is hereby certified that I have verified the particulars in the statement of Account and Solvency including the Statements of Assets and Liabilities as at ……………. and the Income and Expenditure for the period ending …………….. from the accounting records and other books and papers of (LLP) and found than to be true and fair.”

7. New Publications of ICAI :

Technical Guide on Estimation of Future Cash Flows and Discount Rates for the purpose of AS-28 – Impairment of Assets (P. 146 of CA. Journal, July, 2009).
Study on Benefits of Preferential Trade Agreements (P. 153 of CA. Journal July, 2009).
Taxation of Charitable Trusts and Institutions – A Study.
Data Analysis for Auditors (Practical Case Studies on using CAA T’s).
Motor Third Party Claims Management.
Clean Development Mechanism and Carbon Credits – A Primer.
Professional Opportunities for Members – An Appraisal.

ICAI And Its Members

ICAI and Its Members

1. Code of Ethics : Whether a person who is not a partner of an audit firm can sign the audited financial statements and audit report on behalf of the audit firm is a question which is under debate at present. It may be noted that Clause (12) of Part I of First Schedule of the C.A. Act, 1949 provides that a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he allows a person not being a member of the Institute in practice, or a member, not being his partner to sign on his behalf or on behalf of the firm, any balance sheet, profit & loss account, report or financial statements.

The above Clause prohibits a member from allowing another member who is not his partner to sign any balance sheet, profit and loss account, or financial statements on behalf of his firm.

This Clause is to be read in conjunction with S. 26 of the C.A. Act which stipulates that ‘No person other than a member of the Institute shall sign any document on behalf of a Chartered Accountant in practice or a firm of such Chartered Accountants in his or its professional capacity.’

The Council has, however, clarified that the power to sign routine documents on which a professional opinion or authentication is not required to be expressed may be delegated in the following instances and such delegation will not attract the provisions of this clause :

(i) Issue of audit queries during the course of audit.
(ii) Asking for information or issue of questionnaire.

(iii) Letter forwarding draft observations/financial statements.

(iv) Initialing and stamping of vouchers and of schedules prepared for the purpose of audit.
(v) Acknowledging and carrying on routine correspondence with clients.
(vi) Issue of memorandum of cash verification and other physical verification or recording the results thereof in the books of the clients.

(vii) Issuing acknowledgements for records produced.

(viii) Raising of bills and issuing acknowledgements for money receipts.

(ix) Attending to routine matters in tax practice, subject to provisions of S. 288 of the Income-tax Act.

(x) Any other matter incidental to the office administration and routine work involved in practice of accountancy.

It is also clarified that where the authority to sign documents given above is delegated by a firm of Chartered Accountants, the fact that the documents have not been signed by a Chartered Accountant is not a defence to the firm in an enquiry relating to professional misconduct.

However, the Council has decided that where a Chartered Accountant while signing a report, a financial statement or any other document is statutorily required to disclose his name, the member should disclose his name while appending his signature on the report or document. Where there is no such statutory requirement, the member may sign in the name of the firm.

Clause 124(2) of the Companies Bill, 2008 also provides that only a partner of the audit firm, as authorised by the firm, shall sign the audit report and financial statements on behalf of the audit firm.

2. EAC Opinion : The Expert Advisory Committee (EAC) has considered the question of deferred tax treatment in re

spect of assets given on finance lease (see pages 1515 to 1517 of C.A. Journal for March, 2009).

In this case a Government company was engaged in providing rolling stock assets to the Ministry of Railways (MOR) on finance lease. Hence, the rolling stock of assets given on finance lease were not capitalised in the books of the lessor company and shown as ‘lease receivables’ at an amount equal to the net investment in the leased assets as per revised Accounting Standard (AS-19) ‘Leases’. Therefore, the lessor company did not provide depreciation in the books of account but claimed it under the Income-tax Act, as per CBDT Circular No. 2, dated February 09, 2001.

However, while computing the total income, the company added notional depreciation under the Companies Act, even though not provided in the books of account, and claimed depreciation as per Income-tax Act. Thus, the difference in depreciation was considered by the company as a timing difference on which it provided deferred tax liability (DTL). On the these facts, the auditors were of the view that the company should treat the difference in depreciation as permanent difference and no DTL should be provided.

EAC has examined the above facts and stated in

para 12 of its opinion as under : “12. The committee is of the view that, with a view to reflect the true impact of the lease transaction on accounting income and taxable income, the lease transaction as a whole should be considered since the individual items are related. Accordingly, the difference between finance income for accounting purposes and tax finance income representing difference between the lease rental income and depreciation allowance for income-tax purposes originating in a particular year should be treated as timing difference for applying AS-22. This is based on the principle of ‘substance over form’.”

On the above basis EAC has concluded that the method followed by the company for determining DTL was not proper and it should follow the method suggested above.

(Note : Reading the above opinion, it appears that by following the above method the DTL will not get reversed in future and, therefore, this opinion of EAC requires reconsideration.)

3. Auditing Standards:

The following Auditing Standards are issued and published in C.A. Journal for March, 2009 on pages stated below.

(i) Reoised Standard on Auditing (SA) 510 :

Initial Audit Engagements – Opening Balances (Pages 1627-1632),

(ii) Revised Standard on Auditing (SA) 550: Related Parties (Pages 1633-1644)

iii) Standard on Internal Audit (SIA) 14: Internal Audit in an Information Technology Environment (Pages 1645-1648)

(iv) Standard on Internal Audit (SIA) 15 : Knowledge of the Entity and its Environment (Pages 1649-1651)

(v) Standard on Internal Audit (SIA) 16: Using the work of an Expert (Pages 1652-1(53)

4. ICAI News:

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

(i) Enhancing Audit Quality :

Some observations made by the Financial Reporting Review Board are listed on page 1602 in order to enable members to improve the quality of audit of corporate bodies. These observation relate to presentation in financial statements and audit reports as under:

(a) Schedule VI of Companies Act, 1956.

(b) Standard on Auditing (SA) 700 – The Auditors’ Report on Financial Statements.

(ii) Campus Placement Programme – March/April, 2009:

ICAI has organised Campus Placement Programme for newly qualified chartered Accountants at various centres all over India. This scheme has been evolved to provide an opportunity, both to employing organisations as well as the young professional aspirants, to meet and explore the possibility of taking up positions in industry.

It may be noted that in the last such programme organised in August-September, 2008 at various centres, 77 recruiting teams of leading organisations of the country reviewed the bio-data of more than 3800 newly qualified chartered accountants. 874 candidates were offered employment in industry.

Those who have cleared C.A. Final Examination held in May, 2008 and November, 2008 can appear for this interview at the following centres.

(iii) ISA Qualification:

Members who have qualified in the Post-Qualification Course in Information Systems Audit can now use the title D.I.S.A. (lCAI) instead of existing title D.I.S.A. (ICA) (Page 1614).

(iv) Admission of Members in Service as Fellow Members:

The difficulties being faced by members in service while complying with the requirements for admission as fellow members in terms of Regulation 5(3) have been considered by the Council and it is decided that members who are not in practice be admitted to Fellow Membership provided the member has been an Associate Member for a continuous period of five years and submits a self-declaration to the effect that he has been in Government service or is ordinarily holding or has held for a continuous period of not less than five years anyone or more posts carrying duties relating to accounts, cost accounts, audit, finance, taxation, company law, administration and/ or secretarial work in :

(i) an educational institution approved by the Council, or

(ii) a private or government, industrial, commercial or trading undertaking having a minimum paid-up capital of Rs.25 lakhs or a minimum turnover of Rs.50 lakhs or a minimum paid-up capital of Rs.10 lakhs and a minimum turnover of Rs.30 lakhs or minimum total assets of Rs.50 lakhs.

(iii) Employed under a statutory authority; or

(iv) Employed under a local authority having within its jurisdiction a population of not less than 5 lakhs during each of the five years of his service.

The Council has also clarified that there will be no change in the eligibility requirements so far as members in practice and full-time paid assistants under practising Chartered Accountants or firm of Chartered Accountants are concerned.

It is further clarified that there will be no change in other conditions and requirements for admission as a Fellow Member.

For format of self-declaration form visit ICAI website www.icai.org. (Refer page 1615)

(v) ICAI Publication:

Code of Ethics (Revised 11th Education – 2009)

ICAI And Its Members

ICAI & Its Members

1. Disciplinary case :

In the case of ICAI v. Shri Ramesh R. Kapadia,
reported on page 292 of C.A. Journal for August 2008, the complainant (Joint
Director of Industries) alleged that the member had issued the certificates of
consumption of raw materials and production in respect four units of the
enterprise. There was no correlation between the cost of raw materials and the
value of finished goods. It was also alleged that in the certificates, the value
of raw materials was shown as CIF value, whereas this value should be at landed
cost including customs duty. This was not taken into consideration by the member
while reporting the figures of production. It was further alleged that there
were no records with the enterprise and the above certificates were issued
without any verification with the records.

The Disciplinary Committee held that the member was guilty of
professional misconduct under clauses (7) and (8) of Part I of Second Schedule
to the C.A. Act. The ICAI Council accepted this decision and recommended to the
Bombay High Court that the member be reprimanded.

The Bombay High Court has accepted the findings of the
Disciplinary Committee and the ICAI Council and held that the above certificates
were issued by the member without proper care and caution. However, since the
member had admitted his mistake, the High Court held that the member be awarded
the punishment by way of a reprimand.

2. EAC opinion on provision for diminution in value of investments :

The Expert Advisory Committee (EAC) has given an opinion on
the above issue which is reported on page 145 of Volume XXII of the Compendium
of Opinions published by ICAI.

Facts :

A public sector company engaged in the business of refining,
transportation and marketing of petroleum products, acquired shares in another
public sector company at the rate of Rs.1,551 per share as against the book
value of Rs.192.58 per share and market value of Rs.876 per share as on the date
of purchase of shares. The investor company submitted that the above investment
was a strategic investment and the premium of Rs.675 per share was paid
considering the various tangible and intangible benefits such as :

(a) Maintaining the current market share.

(b) Avoidance of erosion of refining volume currently
supplied to acquired company.

(d) Significant potential to add value to the existing
retail marketing capabilities.

(e) Higher retail volume, thereby providing stability to
cash flow, as the retail sale is less susceptible to risk as compared to bulk
sale.

(f) Retail margins are relatively insulated as compared to
bulk sales.

(g) Access to positive cash flow and zero debt company —
significant leverage to raise debt.

On the above basis, the investor company took the view that
the shares of the investee company were acquired as a strategic investment and,
therefore, it was not necessary to provide for any diminution in the value of
investment which was a long-term investment.

Opinion of EAC :

EAC has considered the facts of this case and stated in its
opinion that the company had acquired shares of another company for strategic
reasons and it wanted to hold the shares for a long-term period. The Committee,
therefore, took the view that this was a long-term investment. Thereafter, the
Committee has considered para 17 and 32 of AS-13 and observed as under :

“On the basis of the above, the Committee is of the view
that in case of long-term investments only where there is a decline, other
than temporary, in the value of investments, the carrying amount thereof is
reduced to recognise the decline. The Committee is further of the view that to
determine whether there is a decline other than temporary in the value of
investments, an assessment should be made keeping in view of the assets of the
acquired company, its results, the expected cash flows from the investment,
etc. The market value of the shares is not the sole indicator of decline,
other than temporary, in the value of investments.”

While concluding the opinion, the Committee has stated that
the accounting treatment ‘at cost’ under the head ‘Long-term Investments’ in the
financial statements of the above public sector company, without providing for
diminution in the value, is correct and is in accordance with the provisions of
AS-13.

3. MOU with Information Systems Audit and Control Association (ISACA) :

ICAI has entered into an MOU with ISACA, which is the world’s
leading association serving IS Audit professionals. Under this MOU, our members
will be able to freely access and make use of internationally accepted
standards, guidelines and procedures of ISACA. It will not only bring increased
global acceptability of our DISA qualification in carrying out IS Audits, but
also facilitate active participation of our members in further research being
conducted by ISACA for development of IS Audit standards. The Indian corporate
sector will also benefit by having a framework within which IS Audits will be
carried out by the professionals (Refer p. 227-228 of C.A. Journal for August,
2008).

4. Examination results :

C. Girl students:

i) Out of total of 1,45,378 members, 21038 (14.47%) are women members.

ii) Out of 10,580 students who appeared in CA. Final Examination (Both Groups) held in May, 2008 2767 (26%) were girls.

iii) Pass Percentage – Girl students 27.57% – Boy students 24.09%.

iv) Out of the first five positions in c.A. Final, May, 2008 examination, three (2nd, 3rd and 4th) are girls.

(Source: P. 228 of C.A. Journal for August, 2008)

5. Measures for welfare of members and students:

As a part of the Diamond Jubilee Celebrations of the Institute, ICAI has decided as under:

i) Chartered Accountant’s Benevolent Fund (CABF) :

Chartered Accountant’s Benevolent Fund (CABF) will now make the following ex-gratia payments:

a) Rs.1 lac will be given to the legal heirs of a member in case of unnatural/premature death of a member below the age of 45 years.

b) Financial assistance to the tune of Rs.l lac will be given for medical treatment of a member for specified ailments.

c) Rate of monthly assistance given to members or his/her heirs by the above Fund has now been increased from Rs.3000/ 4500 to Rs.4000/ 5500.

ii) Benevolent Fund for CA. Students:

ICAI has decided to set up a Fund similar to CABF for C.A. Students. ICAI will raise a substantial corpus for c.A. Students Benevolent Fund to provide similar benefits for C.A. Students.
(Refer page 228 of CA Journal, August, 2008)

6. ICAI News:

(Note: Page Nos. given below are from CA. Journal for August, 2008)

i) Enhancing Audit Quality:

Some of the observations made by reviewers while conducting peer review are listed on page No. 343 in order to enable the members to improve the quality of audit of corporate bodies.

ii) Guidance Notes:

The following Guidance Notes are issued by ICAI:

(a)Applicability of AS-20 ‘Earning Per Share’.

(b)Remuneration paid to Key Management Personnel- whether a related party transaction (AS-18).

(c)Applicability of AS-25 to Interim Financial Results.

(d) Turnover in case of Contractors – AS-7.

(Referpages374-376)

iii) Exposure Drafts:

a) Exposure Draft of Standard on Auditing (SA) 265 – Communicating Deficiencies in Internal Control and Explanatory Memorandum on the above subject is published on pages 378 to 387.

b) Exposure Draft of Standard on Auditing (SA) 500 (Revised) – Considering the Relevance and Reliability of Audit Evidence and Explanatory Memorandum on the above subject is published on pages 388 to 395.

iv) ICAI Publications:

Technical Guide on Internal Audit in Telecommunications Industry (Page 361).

v) For Students:

All students who have passed PE-II are permitted to appear in the Final Examination, irrespective of whether they have been registered under Final (Old) syllabus or (New) syllabus, provided they have completed practical training or are serving the last 12 months of articled training on the first day of the month in which the Final Examination is scheduled to be held and complied with other eligibility conditions. (Page 332).

Verification fees of answer books of CA. examinations has been revised. This fee will now be Rs.100 per paper, subject to maximum of Rs.400 effective from May, 2008, examination (Page 355).

ICAI And Its Members

1. Know your ethics :
The Ethical Standards Board of ICAI has discussed some of the ethical issues at page 232 of C.A. Journal for August, 2010 as under :

(i) Whether a member who is carrying out statutory audit and also rendering management consultancy services to his auditee clients can receive fees for such other services, which are in excess of the audit fees ?

A. In exercise of the powers conferred by Clause (1) of Part II of the Second Schedule to the CA Act, the Council of the Institute has issued Guidelines which specify that a member of the Institute in practice shall be deemed to be guilty of professional misconduct, if he accepts the appointment as statutory auditor of Public Sector Undertaking/Government Company/Listed Company and other Public Company having turnover of Rs.50 crore or more in a year and accepts any other work or assignment or service in regard to the same Undertaking/Company on a remuneration which in aggregate exceeds the fee payable for carrying out the statutory audit of the same Undertaking/Company.

Provided that in case appointing authority/regulatory body specify more stringent condition/restriction, the same shall apply instead of the conditions/restrictions specified under the Guidelines.

Explanation :

1. The above restrictions shall apply in respect of fees for other work or service or assignment payable to the statutory auditors and their associate concern put together;

2. For the above purpose,

The term ‘other work’ or ‘service’ or ‘assignment’ shall include Management Consultancy and all other professional services permitted by the Council pursuant to S. 2(2)(iv) of the C.A. Act, but shall not include :

(a) Audit under any other statute;

(b) Certification work required to be done by the statutory auditors; and

(ii) The term ‘associate concern’ means any corporate body or partnership firm which renders the Management Consultancy and all other professional services permitted by the Council, wherein the proprietor and/or partner of the statutory auditor firm and/or their ‘relative’ is/are director or partner and/or jointly or severally hold ‘substantial interest’ in the said corporate body or partnership;

(ii) Is there any ceiling on the number of tax audit assignments that can be taken up by a member in practice ?

A. In exercise of the powers conferred by Clause (1) of Part II of the Second Schedule to the C.A. Act, the Council of the Institute of Chartered Accountants of India has issued General Guidelines, 2008 which specify that a member of the Institute in practice shall be deemed to be guilty of professional misconduct, if he accepts, in a financial year, more than the specified number of tax audit assignments u/s.44 AB of the Income-tax Act, 1961. The number specified for tax audit is 45.

(iii) Whether the audits conducted u/s.44AD, u/s. 44AE and u/s.44AF of the Income-tax Act, 1961 shall be taken into account for the purpose of reckoning the specified number of tax audit assignments ?

A. No. Please refer Chapter VI of Council General Guidelines, 2008 (P. 316 of Code of Ethics, 2009).

2. Opinion of EAC :

Determination of depreciation in case of revaluation and revision in the useful life of land and buildings :

Facts :

A nationalised bank purchased freehold land and building in the year 1950 costing Rs.50 lakh (land Rs.20 lakh and building Rs.30 lakh) and accounted for the same separately as ‘freehold land’ and ‘bank’s own premises’, respectively. On ‘bank premises’ component, the bank is charging depreciation @ 5% on written-down value basis. In the year 2008, the property has been revalued at Rs.100 lakh (land Rs. 80 lakh and building Rs.20 lakh) and the revaluation reserve has been created for Rs.60 lakh towards land and Rs.18.50 lakh towards building, assuming the written-down value of building at Rs.1.5 lakh. The valuer has estimated the useful life as 25 years.

The bank also purchased a leasehold land in the year 1990 with lease period of 99 years and paid Rs.99 lakh. The bank subsequently constructed building thereon in June, 1992 costing Rs.50 lakh. The cost of land is debited to ‘leasehold land’ and construction cost to ‘the bank’s own premises’. The bank is amortising lease rent at Rs.1 lakh per annum and charging depreciation @ 10% on building since 31-3-1993 on written-down value basis. The property has been revalued at Rs.140 lakh (land Rs.100 lakh and building Rs.40 lakh).

The bank has also informed that the bank owns more than 200 properties purchased in different years and all the properties have been revalued in the year 2008.

Query :
On these facts, the bank has sought the opinion of the Expert Advisory Committee on the following issues :
(i) What should be the applicable rate of depreciation in respect of building purchased in 1950 ?

(ii) What should be the applicable rate of depreciation on both original cost and revalued portion, in respect of property constructed in 1992,

(a) If the valuer has estimated the remaining useful life as 40 years ?

(b) If the valuer has not given any useful life and the management, as a policy, is not determining the useful life of the land and buildings ?

(iii) Whether different rate of depreciation will be applicable on the 200 properties purchased in different years and revalued in the year 2008. If yes, what is the mechanism to be followed for implementation ?

Opinion :
The Committee, after considering the introduction paragraph and the definition of the term ‘depreciable assets’ as contained in Accounting Standards (AS-6) ‘Depreciation Accounting’, has observed that as per the GAAPs prevalent in India, freehold land is considered to be having an unlimited life and, therefore, cost thereof is not depreciated. In the context of the leasehold land which is recognised as a fixed asset by the bank, keeping in view of the existing practice of reflecting leases of land in the balance sheets of the lessees, as such leases are scoped out of Accounting Standard (AS-19), ‘Leases’, the Committee noted that the land in question has a lease period of 99 years. Thus, it has a limited useful life for the bank. Accordingly, the upfront amount of Rs.99 lakh paid by the bank for the same should be amortised over its useful life i.e., 99 years, on a systematic basis. The Committee also noted that in this case, the life of the leasehold land is predetermined by the lease agreement, therefore, there is no question of revision of its estimated useful life unless the lease agreement is renewed or the lease terms undergo a change.

Further, after considering AS-6, the Committee opined that :

In respect of property purchased in 1950 the rate of depreciation on building should be determined on the basis of the depreciable amount and its remaining useful life. In case the building has been revalued, the depreciable amount would be the value assigned to the building upon revaluation less its estimated residual value, provided revaluation has been done in accordance with AS-10. The useful life of a depreciable asset is a matter of estimation and is normally based on various factors, including experience with similar types of assets. In case of building constructed on the leasehold land, the useful life of the building cannot exceed the remaining lease period of land.

With respect to the depreciable amount of an asset, the Committee is of the view that ordinarily, the depreciable amount would be the cost thereof less the estimated residual value. In the context of revaluation of buildings the depreciable amount after revaluation would be revalued amount less the estimated residual value of buildings.

(ii) In respect of property constructed in 1992 with respect to determination of rate of depreciation of the building constructed on leasehold land, the principle stated in (i) above would apply. The cost of the leasehold land acquired on lease for 99 years should be amortised over its lease term on a systematic basis.

The rate of depreciation of a building depends on the depreciable amount of the building and its expected useful life. The useful life may vary in case of each building. The depreciable amount may also vary depending on its cost of purchase/construction of its revalued amount, as the case may be, and its estimated residual value. Accordingly, the rate of depreciation may vary for each of the buildings and therefore, should be determined individually for each property.

[Refer pages 266 to 268 of C.A. Journal of August, 2010]

3. ICAI News :

(Note : Page Nos. given below are from C.A. Journal for August, 2010)

i) Special Placement Programme — June, 2010 (page 346) :

Special Placement Programme for new CA Members was organised by ICAI at major centres from 22nd to 26th June. Following was the response.

l (a)

No. of candidates reported

1148

(b) No. of organisations who

participated

(c)

No. of interview teams

(d)

No. of jobs offered

198

(e)

No. of jobs accepted

184

and

(f)

Percentage

16.3

    Highest salary offered :
— International posting — Rs.21 lacs p.a.
— Indian posting    — Rs.12 lacs p.a.

Minimum salary offered :
— Fresh C.A.    — Rs. 5 lacs p.a.
— Experienced C.A.    — Rs. 6 lacs p.a.

Average salary offered :
— Rs. 7 lacs p.a.

ii) Transfer or Termination of Articleship (page 354) :

Regulation 56(1) of C.A. Regulations has been modified as under :

a. Transfer/Termination of Articles is permitted without any restriction during the first year of articles.

b. During rest of the articleship period on satisfying any one or more of the conditions as stated below :

Medical grounds requiring discontinuance of articles for a minimum period of three months, on production of a medical certificate issued by a government hospital.

Transfer of parent(s) to another city.

Misconduct involving moral turpitude.

Other justifiable circumstances/reasons.

iii) ICAI publications :

a) A study on Foreign Contribution Regulation Act, 1976.
b) GST in India & Role of Chartered Accountants.

iv) New Branch in Western Region :

ICAI has opened a new branch in Western Region at Latur w.e.f. 1-7-2010 (P. 358).

(v) e-Journal :

New Hi–Tech Journal has been launched by ICAI. In this Journal one can ‘listen’ the contents of C.A. Journal every month (P. 9).

C.A. Examination results :

CPT (June, 2010) :

Boys

83,664

21,218

25.36

Girls

43,979

13,950

31.72

Total

1,27,643

35,168

27.55

    PEE-II, PCE AND IPCE (May, 2010) :

PEE-II

PCE

IPCE

Both Groups

4,338

1.96

44,687

6,065

13.57

20,135

2,473

12.28

Gr. I

6,912

819

11.84

11,384

2,442

21.45

52,923

8,730

16.49

Gr. II

9,357

841

8.98

17,774

6,024

33.89

22,416

3,804

16.97

Final (May 2010) :

Final
(Old course)

Final (New course)

Both Groups

13,242

458

3.46

7,424

487

6.56

Gr. I

20,049

2,897

14.45

8.840

1,166

13.19

Gr. II

26,517

2,552

9.62

8,670

683

7.88

The pass percentage in Final Examination (old course) in previous years was as under :

Both Groups

Gr. I

Gr. II

May 2010

3.46

14.45

9.62

Nov. 2009

7.86

19.87

10.11

June 2009

13.85

32.42

15.03

Nov. 2008

20.27

27.82

24.15

From the above, it is evident that the trend of pass percentage in Final (old course) is declining in successive examinations. This is a grave cause for concern when Nov. 2010 is the last chance for students appearing under the old course. If this trend continues, over 50,000 students who have studied under the old course will have to appear from May, 2011, for Final examination under the New Course.

ICAI And Its Members

1. Tax audit provision :

(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 ?

Ans. : A member in practice can be a sleeping partner in a family business concern, provided he takes specific permission from the Council in terms of Regulation 190A of CA Regulations.

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

Ans. : He cannot perform the audit although he can apply for Certificate of Practice.

(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.

ICAI And Its Members

ICAI and Its Members

1. Disciplinary case :

In the case of ICAI and Shri M. D. Loya, reported on Page 461
of C.A. Journal for September, 2008, ICAI received information against the
member. It was alleged that in the audit report given by the member in the case
of a public trust u/s.12A(b) of the Income-tax Act (in Form No. 10B) it was
certified that no income or property of the trust was used or applied during the
previous year for the benefit of persons referred to u/s.13(3) of the Income-tax
Act. It was, however, found that certain fixed deposit receipts of the trust
were pledged by the trustees with a bank and a loan was obtained on security of
these FDRs by a firm in which some of the trustees were partners.

The matter was referred to the Disciplinary Committee of the
Institute which found that the member was guilty of professional misconduct
under clauses (7) and (8) of Part I of Second Schedule to the C.A. Act. The
Council of ICAI accepted this finding and recommended to the Bombay High Court
that the member be reprimanded.

After hearing the matter, the High Court observed that it was
clear that the member did not seriously challenge the lapse on his part in not
calling for all the FDRs for physical verification before signing the audit
report. The High Court has accepted the view of the ICAI Council that the member
be reprimanded for this lapse on his part and accordingly passed the order of
reprimand.

2. Revision of Guidance Note on Tax Audit

u/s.44AB of Income-tax Act :

Clause 17(L) was added to Form 3CD by a Notification No.
208/2006, dated 10-8-2006. This clause deals with ‘Amount of deduction
inadmissible in terms of S. 14A of the Income-tax Act in respect of expenditure
incurred in relation to income which does not form part of the Total Income’.
ICAI had issued a supplementary Guidance Note for Tax Audit u/s.44AB in
September, 2006, explaining the implications of the requirement of clause 17(L)
in Form 3CD. The Government has now amended the Income-tax Rules and inserted
New Rule 8D which lays down the method for determining the amount of expenditure
to be disallowed u/s.14A. ICAI has revised the Guidance Note on Tax Audit
u/s.44AB in the month of August, 2008. The text of this revised Guidance Note is
available on Institute’s website www.icai.org. Operative part of this Guidance
Note (Para 40.6) reads as under :

“40.6 The method prescribed under sub-rule (2) of Rule 8D
is applicable when the Assessing Officer is not satisfied with the correctness
of the claim of expenditure made by the assessee or with the claim made by the
assessee that no expenditure has been incurred. Normally this situation would
arise at the time of assessment i.e., after the tax audit has been
completed and the return has been filed. Therefore, at the time of tax audit
the tax auditor will have to verify the amount of inadmissible expenditure as
determined by the assessee. The method under sub-rule (2) of Rule 8D does not
mandate that the assessee should necessarily compute the disallowance as per
the method prescribed under sub-rule (2). Therefore, the assessee may or may
not adopt the same.”

Further, in para 40.11, it is stated that the Tax Auditor
should verify the amount of inadmissible expenses as worked out by the assessee.
If he is in agreement with the assessee, he should report the amount with
suitable disclosures of material assumptions. If he is not in agreement with the
assessee, he should suitably qualify his report as stated in the above Guidance
Note.

(Refer P. 461 of C.A. Journal for September 2008)

3. Accounting Standard (AS-2) (Revised) — ‘Inventories’ :

Exposure Draft of this revised standard has been published
for comments of members by 15-11-2008. There is no major difference between this
Exposure Draft and the International Accountancy Standard (IAS-2) dealing with
‘Inventories’.

The major difference between the Exposure Draft of revised
AS-2 and the existing AS-2 is as under :

(i) On the lines of IAS 2, the Exposure Draft deals with
the subsequent recognition of cost/carrying amount of inventories as an
expense, whereas the existing AS-2 does not provide the same.

(ii) The Exposure Draft provides explanation with regard to
inventories of service providers, whereas the existing AS-2 does not contain
such an explanation.

(iii) The Exposure Draft does not apply to measurement of
inventories held by commodity broker-traders, who measure their inventories at
fair value less costs to sell. However, this aspect is not there in the
existing AS-2. Accordingly Exposure Draft defines ‘fair value’ and provides an
explanation in respect of distinction between ‘net realisable value’ and ‘fair
value’.

(iv) The Exposure Draft provides detailed guidance in case
of subsequent assessment of net realisable value. It also deals with the
reversal of the write-down of inventories to net realisable value to the
extent of the amount of original write-down, and the recognition and
disclosure thereof in the financial statements. The existing AS-2 does not
deal with such reversal.

(v) The Exposure Draft excludes from its scope only the
measurement of inventories held by producers of agricultural and forest
products, agricultural produce after harvest, and minerals and mineral
products, though it provides guidance on measurement of such inventories.
However, the existing AS-2 excludes from its scope, such types of inventories.

(vi) The existing AS-2 specifically provides that the
formula used in determining the cost of an item of inventory should reflect
the fairest possible approximation to the cost incurred in bringing the items
of inventory to their present location and condition, whereas the Exposure
Draft does not specifically state so and requires the use of consistent cost
formulas for all inventories having a similar nature and use to entity.

(vii) The Exposure Draft requires more disclosures as
compared to the existing AS-2.

4. CPE requirements for members in Industry and senior citizens :

ICAI President has clarified the position on this subject on Page 406 of CA. Journal for September, 2008, as under:

“As you are aware, the unstructured learning activities have been made applicable from January this year and we have already issued.a Continuing Professional Education (CPE)Advisory in this regard. However, I notice that there is some apprehension among certain members in industry and senior citizens about this requirement. I may clarify that for members in industry and senior citizens it is not necessary to attend regular CPE programmes. These regular CPE programmes such as seminars, study circle meetings, etc. are called structured learning activities and are mandatory for members holding certificates of practice, but they are optional for members in industry and senior citizens. Members in industry not holding a certificate of practice and senior citizens could comply with the new CPE requirement by reading articles in journals, books, etc. They could read those articles at their leisure.

You will be glad to know that taking this important initiative forward, it has been decided to grant one hour CPE Credit each for reading some selected article(s) published in the Institute’s journal as part of unstructured learning activities from the September 2008 issue itself.”

5. Exposure Drafts on Auditing Standards:

The following Exposure Drafts are issued for comments by members:

(i) Auditing Accounting Estimates, including Fair Value Accounting Estimates, and Related Dis-closures [Revised Standard on Auditing (SA) 540]

(Refer pages 536-560 of CA. Journal for September 2008)

(ii) Related Parties [Revised Standard on Auditing (SA) 550]

(Refer pages 561-576 of CA. Journal for September 2008)

6. ICAI News:

(Note: Page Nos. given below are from CA. Journal for September, 2008)

(i) Internal Audit of Accounts of Stockbrokers:

By letter dated 22-8-2008, SEBI has advised that all Stockbrokers/Clearing members of Stock Exchange should get Internal Audit of their accounts carried out by independent qualified Chartered Accountants. Similarly, the Insurance Regulatory and, Development Authority has also amended its Regulations to provide that every insurance company having Assets under Management (AUM) of not more than Rs.1000 crore shall get Internal Audit conducted on quarterly basis. Insurance companies with AUM of above Rs.1000 crore should appoint a Chartered Accountant firm for Concurrent Audit (Page 406).

(ii) Certificate Course on IFRS and Valuation:

ICAI has decided to conduct (a) a Certificate Course on ‘International Financial Reporting Standards’, and (b) a Certificate Course on ‘Valuation’. Both the courses are to be launched in September/October 2008. (Page 406)

(iii) Rules of Arbitration:

ICAI has issued the ‘ICAI Rules of Arbitration’ and also decided to start a Certificate Course on Arbitration for our members. Details are hosted on Institute’s website. (Page 407)

(iv) ICAI Toll-free telephones:

Toll-free telephones for getting services from ICAI are now available as under:

(v) Examination on alternate days:

To reduce stress of our students, it has been decided that from November 2008, Institute examinations will be held on alternate days. Thus November 2008 examinations will be held from 1st to 16th November 2008. (Refer Pages 408 and 532)

(vi) International Conference at Jaipur in November, 2008:

The above conference for members is to be held from 20th to 22nd November, 2008. The details are on Institutes website. (Page 408)

(vii) Recognition for Ph.D Course:

University of Rajasthan has recognised the CA. Course for the purpose of doing Ph.D from that University. (Page 418)

(viii) Peer review:

Some major deficiencies noticed by reviewers while conducting peer review are published on Page 513.

(ix) Director (Discipline) :

ICAI has appointed CA Smt. Vandana Nagpal, Senior Deputy Secretary, as Director (Discipline) to head the Disciplinary Directorate. This Directorate is for making investigations in respect of information and complaint cases against members.

(x) New publication of ICAI :

Technical Guide on E-Commerce – Consideration for Audit of Financial Statements. (Page 531)

(xi) Obituary:

(a) CA P. M. Narielvala, former President of our Institute, passed away on 8-8-2008 at Kolkata. He was our President in 1975-76 and a Council Member of ICAI for two terms for 1967-70 and 1973-76. The accountancy profession in India has lost one of its leading lights. We pay our respectful homage and pray that the departed soul may rest in peace. (Page 418)

(b) CA S. P. Chhajed, Former President of our Institute passed away on 18-9-2008 at Mumbai. He was our President in 1999-2000 and Council Member of ICAI from 1982 to 2001. Shri Chhajed was a very popular figure in Mumbai and other places. Our profession has lost a leading personality. We pay our respectful homage and pray that the departed soul may rest in peace.

ICAI And Its Members

1. Disciplinary case :

In the case of ICAI v. Dayal Singh, (Page 589 of C.A. Journal, October, 2009) the complainant alleged that the member was instrumental in getting a loan of Rs.49.8 lacs sanctioned from a Bank in favour of M/s. S. K. Trading Co. (Firm) on the basis of forged documents such as quotations, supply orders, money deposit receipts, rent deeds, rent receipts, etc. It was also alleged that the member gave a false certificate stating that the Firm had brought the contribution required in the books. On the basis of this certificate the Bank released the loan amount.

The disciplinary committee gave a report that the member was guilty of ‘Other Misconduct’. The council has accepted this finding and recommended to the High Court that the name of the member be removed from the register of members for a period of one month.

The Delhi High Court observed that the act of the member in issuing such a vague certificate with the intention of persuading the Bank to grant loan to his client was ‘Other Misconduct’. The High Court also observed that the lack of responsibility displayed by the member clearly shows that he had acted in a manner unbecoming of a Chartered Accountant and, therefore, the Council rightly recommended removal of his name form the register of members for a period of one month. As regards the punishment recommended by the Council, the High Court observed that there has to be some degree of integrity and probity which is expected of a Chartered Accountant who is regularly concerned with financial transactions and on the basis of whose recommendations and certificates financial institutions such as banks disburse loans or enter into other financial transactions. Under the circumstances, the Court was of the view that the punishment awarded to the member was not unduly harsh.

2. Some ethical issues :

The Ethical Standards Board of ICAI has issued the following clarifications on some ethical issues in the form of questions and answers for the benefit of members.

(i) Q. Can a chartered accountant in practice agree to select and recruit personnel, conduct training programmes and work studies for and on behalf of client ?

A. Yes, 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) Q. Whether a member in practice can act as insurance agent and arrange business for the Insurance Companies ?

A. No, a member in practice is permitted to render Insurance Financial Advisory Services only. It is not permissible for member to do any kind of marketing and business procurement for any insurance company. Their services are limited to professional services in the form of advisory and consultancy services.

(iii) Q. Whether Code of Ethics is applicable outside India ?

A. The Code of Ethics of the Institute is applicable to all the members, even outside India.

(iv) Q. 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 ?

A. No, as per C.A. Act, 1949, a member is not permitted to indicate in a book or an article, authored/contributed/published by him, his association with any firm of Chartered Accountants.

(v) Q. Can a Chartered Accountant in practice seek professional work from his professional colleagues ?

A. Yes, as per C.A. Act, 1949 a member is permitted to apply or request for, or to invite, or to secure professional work from another Chartered Accountant practice.

(Refer Page 572 C.A. Journal October, 2009)

3. Classification of Compulsorily Convertible Debentures in the Balance Sheet — EAC Opinion :

A private limited company, engaged in the business of construction and development of real estate, issued ‘Compulsorily Convertible Debentures’ to a Bank. These debentures were compulsorily convertible into equity after 39 months. Till the date of conversion interest at 13.65% p.a. was payable. The debentures were unsecured.

The company held the view that the amount raised by compulsorily convertible debentures has to be treated as ‘equity’ and should form part of Shareholders Funds. The auditors took the view that this amount should be considered as ‘Unsecured Loans’. When the matter was referred to the Expert Advisory Committee (EAC) of ICAI, it has given the following opinion.

From the facts of the case it is evident that the debentures issued by the company carry an interest @ 13.65% on quarterly basis till the date of conversion. Accordingly, the Committee is of the view that till the date of conversion the debentures are in the nature of loans. The company is a private limited company and, therefore, the provisions of Schedule VI to the Companies Act, 1956 would apply with respect to the form of balance sheet of the company. Schedule VI to the Companies Act, 1956 requires debentures to be classified under the head ‘secured loans’ and the disclosure is required to be made with respect to the terms of redemption or conversion (if any) of debentures issued to be stated together with earliest date of redemption or conversion. The debentures issued by the company are unsecured. Accordingly, the committee is of the view that the same should be classified under the head ‘unsecured loans’ in the balance sheet of the company.

(Refer Page 590 of C.A. Journal — October, 2009)

4. Campus Placement Programme :

ICAI organised Campus Placement Programme for newly qualified Chartered Accountants at 16 centres during the month of September, 2009. 3235 candidates appeared before 133 Interview Teams representing 71 organisations. 902 jobs were offered. Highest salary offered was Rs.10.61 lacs p.a. Minimum salary offered was Rs.3 lacs p.a. Average salary offered to the candidates works out to Rs.5.15 lacs p.a. (Refer page 574 of C.A. Journal for October, 2009).

5. Present status of ICAI Branch buildings:

Land has been acquired for the building of the branches of Pimpri – Chinchwad (15,000 sq.ft.), Kota (1,277.75 sq.ft.), Hubli (38,745sq.ft.), Sangli (4,888.16 sq.ft.), Ahmednagar (4,990 sq.ft.), [algaon (5,200 sq.ft.), Bhilwara (27,000 sq.ft.), Mathura (6,988.59 sq.ft.), Faridabad (28,890 sq.ft.) Hisar (20,498 sq.ft.), Kakinada, Vijayawada, Sangrur, Bilaspur, Bikaner and Ajmer, while the acquisition is still in process for Rohtak.

The construction of ICAI Bhavan branch building has been completed at Cuttak and Mangalore (renovated). A building measuring 8,200 sq.ft. has been acquired for the Pune branch.

Construction for Auditorium in Ludhiana and Indore has been completed and same have been inaugurated and become functional. Besides, a seminar hall in Guntar has also become operational.

Building construction has been commenced for the branches and the proposal for construction of building is under consideration for the branches of Mathura, Faridabad, and Bellary.

The proposal of acquisition of land is already approved for the branches of Kottyam, Solapur, Kolhapur, Jammu & Kashmir and Nellore. The branches of Varanasi, Bareilly and Allahabad have already started the process of acquisition of land.

The Building Committees for the branches, which do not have their own land or building, have been advised to acquire land and building respectively.

The guidelines have also been revised. It has been decided to standardwise the front elevation of the branch buildings.

A new branch at Vapi (WIRC) has been set up taking the total number of ICAI branches to 119.

(Refer Pages 558 of c.A. Journal for October, 2009)

6. Peesent studies of IFRS – Convergence:

To ease the convergence with IFRS, the Ministry of Corporate Affairs has constituted a core group under the Chairmanship of Secretary, Ministry of Corporate Affairs, while three members from the ICAI have been nominated for the core group.

The ICAI, as part of its efforts to facilitate smooth implementation of IFRS from 2011, has launched a website on IFRS and prepared study materials for each individual IFRS.

A CD on e-learning on IFRS has also been issued.

In-house Executive Development Programmes were organised for the corporates for imparting training on IFRS. Nearly 25 such programmes have so far been conducted since February, 2009.

A study group has been formed to study the tax implications of the implementation of IFRS in India.

Report on issues relating to SEBI Rules and Regulations (other than Mutual Funds) arising out of convergence has been finalised.

Report on issues relating to Companies Act aris-ing out of convergence with IFRS has been finalised.

(Refer Page 562 of CA. Journal for October, 2009)

7. Accounting Standards for Local Bodies (ASLB) Exposure Drafts:

Following Exposure Drafts are published for comments by members:

i) Property, Plant and Equipment (ASLB) 5

ii) Events after Reporting Dates (ASLB) 6

(Refer Pages 683 and 693 of CA. Journal for October, 2009)

8. ICAI News:

(Note Page Nos. given below are from CA. Journal for October, 2009)

i) Election Code of Conduct:

As reported on Page 98 of B.CA. Journal for October, 2009, elections to Central and Regional councils are to be heldon 4th and 5-12-2009. ICAI has published the Election Code and Conduct on Pages 673-677. Members are requested to take a note of this Code of Conduct and ensure that they vote on the date/s fixed for these elections. Names of members contesting these elections will be intimated to each member by ICAI in the month of November, 2009.

ii) New Publications of lCAl :

a) Compendium of Statements on Auditing (As on 1-7-2009)

b) Compendium of Guidance Notes on Auditing Pronouncements (as on 1-7-2009) (refer Page 664)

iii) Outsourcing by Registrar of Companies (ROC) :

ROC has decided to outsource the work of technial scrutiny of Financial Statements for 2009-10 filed by companies with ROC to our members (Page 546).

iv) Special Audit of Excise Records:

S. 14A and S. 14AA of the Central Excise Act, 1944 have been amended in the last Budget. Our members as well as Cost Accountants are now eligible to conduct Special Audit u/s.l4A dealing with computation of ‘Value of Goods’ and u/s.14AA dealing with ‘verification of proper utilisation of credit’ under the Central Excise Act and Rules. (Page 546)

v) Accounting Technicians:

Students who have passed Intermediate/PE-II/PCE and completed the prescribed period of articleship can opt to apply for issue of Accounting Technician Certificate without any further conditions. No fee is payable for this purpose. They will continue to be eligible to appear in the Final Examination. (Page 549)

vi) Names of candidates for lCAl Elections:

The following candidates are contesting the elections to be held on 4th and 5th December, 2009, for Central/Regional Councils from Western Region. Members are requested to note the names and treat it as their duty to cast their votes. Each member has to select a deserving candidate so that we have a strong council at the Centre and at the Regional Level which can enhance the prestige of our profession. We have to elect 11 candidates for central council and 22 candidates for WIRC The voting is by Single Transferable vote system.

a) Candidates for Central Council from Western Region

CA (1) Rajkumar Adukia, (2) Brijmohan Agarwal, Atul Bheda, (4) Praful Chhajed, (5) Ms. Bhavna Doshi, (6) Tarun Ghia, (7) Jayant Gokhale, (8) Pankaj [ain, (9) Nihar Jambusaria, (10) S. K. Maheshwari and I l I) Nilesh Vikamsey from Mumbai, (12) Arun Aanandagiri, (13) K. L. Bansal, (14) C V. Deshpande and (15) S. B. Zaware from Pune, (16) Durgesh Buch, Dhinal A. Shah, (18) Dilip Shah, and (19) Raju C Shah, from Ahmedabad, (20) M. K. Madkholkar (Thane), (21) Mahesh Sarda (Rajkot), (22) B. K. Rathi and (23) Hardik P. Shah from Surat, (24) Ashok R. Thakkar (Vadodara) and (25) [aydeep N. Shah (Nagpur).

b) Candidates for WIRC :

CA (1) S. H. Agarwal, (2) V. K. Agarwal, (3) A. S. Bhandari, (4) V. V. Dodhia, (5) N. C. Hegde, (6) A. C. Jain, (7) S. Y. Joshi, (8) D. K. Kabra, (9) J. V. Kala, S. K. Kedia, (11) D. K. Khandelwal, (12) M. P. Khare, (13) S. D. Lalan, (14) N. P. Majilhia, (15) N. L. Mishra, (16) S. K. Ratodia, (17) Ramesh Shetty, Shardul D. Shah, (19) Ms. Shruti J. Shah, (20) R. S. Sharma, (21) A. P. Shenoy and (22) K. K. Vaidya from Mumbai, (23) A. J. Patel, (24) A. K. Patel, (25) N. M. Pathak, (26) P. R. Raval, and (27) Y. A. Vyas from Ahmedabad, (28) R. N. Advani, (29) K. S. Mantary and (30) Dayaram Paliwal from Thane, (31) D. M. Apte, (32) D. B. Gandhi, (33) M. Y. Limaye and (34) C. D. Upasani from Pune, (35) S. G. Brahme (Dombivli), (36) J. A. Chaaira and (37) M. S. Modi from Surat, (38) P. D. Dhamankar (Vasai), (39) M. M. [oshi, and (40) J. M. Shah from Nagpur, (41) C. V. Pawar (Nashik), (42) R. N. Shah (Vadodara), (43) U. R. Sharma (Aurangabad) and Gautam Verlekar (Goa).

ICAI And Its Members

1. ICAI News :

(Note : Page
Nos. given below are from C.A. Journal for April, 2010)

(i) The Council
of ICAI has constituted four new groups to make the Institute more responsive,
progressive, robust and member/student-friendly. These groups are as under.

(a) The
Central Grievance Redressal Cell :

This cell will
mainly work to effectively and speedily resolve the grievances received from
members and students across the nation centrally.

(b) Codification
of Regulations, Directions of Council regarding functions of Branches of
Regional Councils Group :

This group will
study and examine the provisions of existing regulations, directions of the
Council regarding the functions of Regional Councils or their Branches and
various decisions of the Council/the Executive Committee in place and suggest
suitable changes therein, so as to make such provisions more effective and
members/students-friendly and improve overall functioning of the Branches,
including the aspect of staff and technology requirements.

This group will
mainly prioritise various infrastructure projects of ICAI and study, consider
and suggest ways and means of accelerating the ongoing projects besides
ensuring efficient management and maintenance of ICAI properties.

(d) The
Information Technology Initiatives Group :

This group will
see to it that the Institute becomes more hi-tech to the ultimate benefit of
its members and students. (Refer pages 1564-1565)

(ii) Campus
Placement Programme

February-March
2010 :

The first phase
of the interview process for new members of ICAI under the above programme has
been held in February-March, 2010 in 16 major cities. 94 companies participated
in this programme seeking placement for more than 1600 Chartered Accountants.
2906 candidates registered for the above campus interviews. In the first phase,
1032 candidates have been offered jobs. It is reported that this year’s
response far exceeded the response in 2009. It is interesting to know about
some details given on pages 1691-1692 of jobs offered by various companies.

(i) Remuneration
offered :

(a) International
posting :

Name of company

CTC offered

Total job offers made

Olam International

1,50,00 US $ (approx.Rs.70 lacs per annum)

Tolaram Corporation Pvt. Ltd.

Rs.20.75 lacs per annum

Topaz Energy and Marine

Rs.12 lacs per annum

(b) Domestic
posting :

Name of company

CTC offered

Total job offers made

Axis Bank

Rs.10.82 lacs per annum

ITC Limited

Rs.10.61 lacs per annum

BPCL

Rs.9.5 lacs per annum

Summary of job offers and acceptance at selected places?:

Some ethical issues :

The Ethical Standards Board has considered some ethical issues and given its views on page 1572. Some of these issues are as under :

i) Can a practising Chartered Accountant accept a position as auditor previously held by some other Chartered Accountant in such conditions as to constitute undercutting ?

Ans. : A Chartered Accountant in practice can accept a position as auditor previously held by some other Chartered Accountant in such conditions as to constitute undercutting (vide amendment in the CA Act in 2006).

ii) Whether a member of the Institute will be guilty of professional misconduct, if he, not being a fellow, styles himself as a fellow ?

Ans. : As per Clause (1) of Part III of the First Schedule to the CA Act, a member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct if he, not being a fellow, styles himself as a fellow.

iii) Can a Chartered Account in practice disclose information acquired in the course of his professional engagement ?

Ans. : As per Clause (1) of Part I of Second Schedule to the CA Act, a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he discloses information acquired in the course of his professional engagement to any person other than his client so engaging him, without the consent of his client or otherwise than as required by any law for the time being in force.

iv) Whether an auditor is required to provide the client or other auditor of the same enterprise access to his audit working papers ?

Ans. : Working papers are the property of an auditor. An auditor is not required to provide the client ac-cess to his audit working papers. The main auditors of an enterprise do not have right to access to the audit working papers of the branch auditors, except in case it is required by the regulatory norms.

v) Whether a joint auditor will be responsible for the work done by other joint auditor ?

Ans. : Council direction under Clause (2) of Part I of the Second Schedule to the CA Act prescribes that in respect of audit work divided among the joint auditors, each joint auditor is responsible only for the work allocated to him, whether or not he has prepared a separate report on the work performed by him. However, on the other hand, all the joint auditors are jointly and severally responsible for the work which is not interse divided among the auditors, and also for compliance of requirements of relevant statues.

vi) Can a member in practice express his opinion on financial statements of any business or enterprises in which he, his firm or a partner in his firm has a substantial interest ?

Ans. : As per Clause (4) of Part I of the Second Schedule to the CA Act. A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he expresses his opinion on financial statements of any business or any enterprise in which he, his firm or a partner in his firm has substantial interest. (Vide amendment in the CA Act in 2006, even after disclosure of interest by the member, expression of opinion is not allowed.)

(For this purpose, ‘Substantial Interest’ means 20% or more interest held by the member or his relatives in the concern. (Refer Appendix-9 of CA Regulations)

vii) Whether a member in practice will be held liable for failing to keep moneys of his client in a separate banking account or to use such moneys for purposes other than they are intended for ?
Ans. : As per Clause (10) of Part I of Second Schedule to the CA Act, a member in practice shall be deemed to be guilty of professional misconduct, if he fails to keep moneys of his client other than fees or re-muneration or money meant to be expended in a separate banking account or uses such moneys for purposes other than they are intended for.

viii) Whether a statutory auditor can accept the system audit of the same entity ?

Ans. : The statutory auditor can accept the assignment of a system audit of the same entity, provided it did not involve any scrutiny/review of financial data and information.

3. Disclosure in Cash Flow Statement of Borrowings, etc. in the case of a financial institution :

i) Facts :
A company is recognised as a Financial Institution. The company is engaged in financing of power sec-tor in India. The company prepares its Cash Flow Statement using the indirect method as per AS–3 dealing with ‘Cash Flow Statements’. While preparing financial statements, the company disclosed the net cash outflows/inflows from loan disbursements made to/principal repayments received from the borrowers under the head ‘cash flow from financing activities’. The company also disclosed the net in-flows/outflows from loans borrowed from/principal repayments made to lenders under the head ‘cash flow from financing activities’.

The auditors of the company objected to this presentation. They were of the view that the above amount should be shown under ‘cash flow from operating activities’. The company is of the view that AS-3 defines the operating activities as “the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities”.

ii) Query :
The company sought opinion of Expert Advisory Committee (EAC) on the following issues :

a) Whether it is correct to classify the amounts of loans disbursed to and the repayments received from the borrowers under the head ‘cash flows from operating activities’, and the amounts of loans raised from and the repayments made to the lenders under the head ‘cash flows from financing activities’, as per the indirect method of preparation of cash flow statement as per AS-3.

ii) If not, what is the correct method of disclosure of the amounts of loans disbursed to and the repayments received from the borrowers, and the loans raised from and the repayments made to the lenders, as per the indirect method of preparation of cash flow statement as per AS-3.

iii) EAC opinion :
While giving this opinion EAC has considered paras 5, 14, 17 and 20 of AS-3 and given its opinion as under :

a) It is correct to classify the amounts of loans raised from and the repayments made to the lenders under the head ‘cash flows from financing activities’ and the amounts of loans disbursed to and the repayments received from the borrowers under the head ‘cash flows from operating activities’, as per the indirect method of preparation of cash flow statement as per AS-3. For the purpose of the preparation of cash flow statement, the aforesaid amounts would be arrived as increased/decrease in the borrowings and loans & advances outstanding in the two balance sheets relevant for the Cash Flow Statement.

b) Since the answer to (a) above is not in the negative, this question does not arise.

Accounting Standards :
Accounting Standards Board (ASB) has issued expo-sure drafts revising the following accounting standards and also issued some exposure drafts of new accounting standards after convergence with Inter-national Financial Reporting Standards (IFRS) for public comments.

   Revised Standards :
   i) AS-4 (Corresponding to IAS-10) — Events after Reporting Period.
   ii) AS-5 (Corresponding to IAS-8) — Accounting Policies, Changes in Accounting Estimates and Errors.

   iii) AS-7 ( Corresponding to IAS-11) — Construction Contracts.
   iv) AS-10 (Corresponding to IAS-16) — Property, Plant and Equipment.
   v) AS-11 (Corresponding to IAS-21) — The Effects
   vi) AS-19 (Corresponding to IAS-17) — Leases.
   vii) AS-21 (Corresponding to IAS-27) — Consolidated and Separate Financial Statements.
   viii) AS-23 (Corresponding to IAS-28) — Investments in Associates.

   ix) AS-25 (Corresponding to IAS-34) — Interim Financial Reporting.

   New Standards :
   x) AS-34 (Corresponding to IAS-29) — Financial Reporting in Hyper Inflationary Economies.
   xi) AS-35 (Corresponding to IFRS-6) — Exploration for Evaluation of Mineral Resources.
   xii) AS-37 (Corresponding to IAS-40) — Investment Property.

5. Auditing Standards :
The following Standards on Auditing (SA) have been finalised and published at pages stated below. This will apply to Financial Statements for periods begin-ning on or after 1st April, 2011 :

   i) SA-710 (Revised) — Comparative Information — Corresponding Figures and Comparative Financial Statements. (pages 1693-1698)
   ii) SA-800 — Special Considerations — Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks. (pages 1699-1702)
   iii) SA-805 — Special Considerations — Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement. (pages 1703-1708)
   iv) SA-810 — Engagements to Report on Summary Financial Statements. (pages 1709-1716)

ICAI and its members

Message from Ministry of Corporate Affairs :

“Over the years, the ICAI has made a name for itself in the development of accounting discipline. It has been catering to the needs of modern day accountancy requirements by generating qualified CAs to meet the present as well as the future needs of the industry.

The Institute has intensified its focus on global best practices and has raised the bench mark of accountancy profession in India. It has thus come a long way since its establishment”.

EAC Opinion

Accounting for unspent expenditure towards Corporate Social Responsibility

Facts:

A company being a Government of India enterprise, is engaged in the business of transmission of power from the generating units in central sector to various State Electricity Boards.

The company has stated that the Guidelines on Corporate Society Responsibility (CSR) for Central Public Sector Enterprises (CPSEs), issued by the Department of Public Enterprises (DPE) on 9th April, 2010, provides that each CPSE has to mandatorily create CSR budget through a board resolution as a percentage of net profit of the previous financial year. The above guidelines also provide that the amount allocated for CSR activities should be transferred to a CSR fund which will accumulate – as in the case of non-lapsable pool for the North East.

In accordance with the above guidelines, in the financial year (F.Y.) 2011-12, 1% of profit after tax (PAT) of the previous year was earmarked to CSR activities after approval of the Board of Directors.

The company has also stated that upto the F.Y. 2010- 11, actual expenditure incurred on CSR activities was charged to the statement of profit and loss and the difference between 1% of PAT of previous year and actual expenditure (hereinafter called as ‘unspent expenditure’) was appropriated through the statement of profit and loss to CSR reserve.

During the F.Y. 2011-12, it was considered that unspent expenditure is not in the nature of reserve to be created by appropriation of profit but is an obligation to be incurred. As such, it is in the nature of provision rather than reserve fund. Accordingly, provision was made for the unspent expenditure for the year as well as unspent expenditure as at the beginning of the year.

Query:

On the basis of the above, the company has sought the opinion of the Committee on the following issues:

(i) Whether the unspent expenditure should be charged to the profit and loss account and provision be created for the same, or (ii) the unspent expenditure be appropriated through the profit and loss account to CSR reserve, or (iii) to adopt any other accounting treatment.

Opinion:

The Committee noted the definitions of ‘provision’. ‘liability’ ‘obligating event’ ‘present obligation’ and paragraphs 14, 16, 17 and 18 of AS 29, notified under the Companies (Accounting Standards) Rules, 2006 as well as DPE Guidelines and is of the view that as per the DPE Guidelines, there is a mandate for creation of a budget/fund and not to spend on CSR activities as a percentage of profits, which would only form a basis for evaluation of the performance of an enterprise. However, there is no mandate on the amount of expenditure, which has to be necessarily incurred by an enterprise during a period of its operation. Thus, there is a mandate only on the creation of a budget or fund rather than an obligation to incur expenditure during a period. Since as per DPE Guidelines, there is no such obligation on the enterprise, provision should not be recognised. Accordingly, the Committee is of the view that the requirement in the DPE Guidelines for creation of a CSR budget can be met through creation of a reserve as an appropriation of profits rather than creating a provision as per AS 29.

[Pl. Refer Page nos. 139 to141 C. A. Journal – July, 2013]

ICAI News:

(Note: Page Numbers given below are from C.A. Journal of July, 2013)

i) Member as a senior citizen – Age reduced to 60 (P.182)

The Council of the ICAI has decided to reduce the age from 65 years to 60 years for treating a member as senior citizen for the purpose of payment of annual membership fee and certificate of practice fee.

ii) New Branches of ICAI (P. 167 to 168)

The following five branches of ICAI have been established. With this addition, there are 138 Branches of ICAI in India now.

a) Sikar (Rajasthan) – CIRC
b) Sirsa (Rajasthan) – NIRC
c) Rewari (Haryana) – NIRC
d) Nanded (Maharashtra) – WIRC
e) Dhule (Maharashtra) – WIRC

iii) Branches of WIRC Students Association (P. 169)

The following branches have been set up

a) Latur (b) Ahmedabad (c) Sangli and (d) Goa

iv) The following Institutions have recognised Chartered Accountancy Qualification for registration to PhD Programme (P. 169 to 171)

a) Arinahilingam Institute for Home Science and Higher Education for Women, Coimbatore – deemed university

b) Indian Institute of Technology, Madras

c) Dr. D.Y. Patil Vidyapeeth University, Pune

d) Central University of Jharkhand, Ranchi.

v) The following Campus Placement Programme for newly qualified C.As. has been or organised by ICAI during the month of August and September, 2013 (P. 180)

No.

Centre

Interview Dates

Ahmedabad, Bhubaneswar,

12th -19th

Chandigarh,
Coimbatore,

August,2013

Ernakulam, Indore,
Jaipur,

Kanpur, Nagpur, Pune

Bengaluru, Chennai, Hyderabad,

6th -13th

Kolkata, Mumbai, New
Delhi

September, 2013

ICAI and its Members

1. Finances of ICAI

Audited Accounts of ICAI for the year ended 31-3-2012 have been recently released at the 63rd Annual Meeting held in February, 2013. The summarised position given below will show that the net worth of ICAI as at 31-3-2012 was Rs. 838.77 crore. (including Earmarked Funds of Rs. 162.86 crore). The Net Surplus as per Income & Expenditure Account for the year ending 31-3-2012 was Rs. 182.61 crore.

4. Our New President and Vice President

On 12-2-2013, Shri Subodh Kumar Agrawal (Kolkatta) is elected as President and Shri K. Raghu (Bangalore) is elected as Vice President of ICAI for the year 2013-14. Our greetings and best wishes to both of them for a successful term of office.

5. EAC Opinion

Accounting for Preliminary and other Pre-operative expenses and Government Grants in Profit and Loss Statement

Facts

A State Government accorded sanction for implementation of the High Speed Rail Link (HSRL) to the International Airport. A Ltd., a wholly owned Government company, was appointed as nodal agency of the State Government for the HSRL project and to play a similar role that it has been playing in the implementation of another International Airport. Further, sanction was also accorded to constitute Special Purpose Vehicle (SPV Ltd.) to implement the project on PPP – BOT basis by inviting Expression of Interest (EOI) and Request for Proposal (RFP). A Ltd. was also authorised to engage the services of another company, B Ltd on assignment basis as project consultants to assist SPV Ltd., in the implementation of this project.

By another Government order, sanction was accorded to release an amount of Rs. 2.50 crore to A Ltd. for utilising the funds to pay consultancy fee to study the impact of City Airport Terminal (CAT) on the traffic and to suggest engineering solution to tackle the traffic problem and project consultancy fee for incorporation of SPV Ltd. and documentation charges/fee for preparation of MOA & AOA of SPV Ltd., Accordingly, A Ltd. incorporated SPV Ltd. on 31st March,2008 with the main objective-to implement HSRL Project to an International Airport under PPP concept. SPV Ltd. initially issued 49,996 shares to A Ltd and 4 shares to nominees of State Government, Thus, it became a subsidiary of A Ltd.

Thereafter, SPV Ltd. prepared its accounts for the period from the date of incorporation to 31st March,2009 i.e. for the first year. It prepared only balance sheet and no profit and loss account or income and expenditure account was prepared as company had not commenced its operations. A note was given that pre-operative/implementation (construction) period expenses till the completion of the project will be capitalised and preliminary expenses would be amortised in five equal installments after commencement of its operation. In the next year i.e. in the financial year 2009/10, the SPV Ltd .prepared its profit and loss account and preliminary expenses and pre-operative expenses were charged including the expenses incurred by A Ltd on behalf of SPV Ltd., in the profit and loss statement.

Query

On these facts, an opinion of EAC was sought, whether the accounting by SPV Ltd. for expenses/ funds which were received by A Ltd. as promoter of SPV Ltd. by preparing the profit and loss account for the financial year 2009/10 is in compliance with the requirements of the Companies Act, 1956 and Accounting Standard issued by ICAI and if not what is the appropriate accounting treatment?

Opinion

The Committee after considering AS-26 was of the view that cost of starting up an activity that includes incorporation expenses, including preliminary expenses incurred by A Ltd. towards incorporation of SPV Ltd., in bringing an enterprise into existence as a separate legal entity should be expensed as no intangible asset or other asset is acquired or created that can be recognised, unless such expenditure is required to be capitalised as part of the cost of a fixed asset as per AS-10 in the books of SPV Ltd.

Further, the Committee was of the view that the funds received from the Government meet the definition of “government grants” as per provisions of AS-12 and should be recognised accordingly. Besides, the Committee was of the view that funds received were both in the nature of grants related to revenue and of the nature of promoters’ contribution. Hence, the funds received for meeting the envisaged obligation of SPV Ltd. should be treated as income to match against the expenses incurred for the period. The funds in the nature of “promoters’ contribution” should be taken to capital reserve as per the requirements of AS 12 and amount received from the Government against the issue of the shares be recognised as share capital.

As regards preparation of profit and loss account before commencement of commercial operations by the SVP Ltd., the Committee noted that as per requirement of section 210 of the Companies Act, 1956, a profit and loss account has to be prepared for each annual general meeting from the date of incorporation of SPV Ltd. Same view has been taken in the circular no. 2/17/64-ER dated 29th January, 1964 issued by the Department of Company Affairs. Hence, the preliminary and other expenses incurred should be expensed in the year of their incurrence. Similarly, the grants which were earned by SPV Ltd. during the period should be recognised as per requirements of AS 12. Therefore, the Committee has taken the view that the profit and loss account should be prepared by SPV Ltd. from the date of incorporation, even before commercial commencement of the project.

Hence, the accounting by SPV. Ltd for expenses/ funds received by A Ltd. while preparing the profit and loss account of the financial year 2009/10 was not correct and was not in compliance with AS 10, AS 26 and AS 12. The expenses/funds received should be accounted for in the profit and loss account of SPV Ltd. of the respective years in which these are incurred/earned.

[Pl. Refer Page nos. 1246 to 1253 of C. A. Journal – February, 2013]

6. ICAI News
(Note : Page Nos. given below are from C.A. Journal for February, 2013)

(i) Council Elections – 2013
Results of Council Elections held in December, 2012 were declared on 7-1-2013. 22nd Council was constituted effective from 12-2-2013. Out of 1,92,641 voters, 90,228 voters (46.83%) exercised their franchise. Region wise voting percentage was Western 49.81%, Southern 44.07%, Eastern 42.23%, Central 46.14% and Northern 47.45%. (Page – 1171)

(ii) November, 2012, Final Examination Result.
(a) Both groups – 12.97%, (b) Group I – 27.30%, (c) Group II – 21.85%
Rank –   1 Ms. Prema Jaykumar (Mumbai) 75.88%
Rank –   2 Mr. Ashokkumar Indiana (Rajamahendra varam) 75.25%
Rank –   3 Mr. N. Gnansampath (Coimbatore) 74.13% (P. 1173)

(iii) Members of New Central and Regional Councils
Names of New Central Council and Regional Council members and given on pages 1184/1185.

(iv) New Publications
ICAI has published a book on “Commonly Used Terms in Public Finance & Government Accounting”.
(P. 1326)

(v) ICAI Awards – 2012
ICAI has declared the following Awards to Western Region for 2012
(a) Best Regional Council – WIRC
(b) Best Students Association – Western India
(c) Best Branch (Large Branch) – Baroda, Nagpur (WIRC) and Ludhiana (NIRC)
(d) Best Branch (Medium Branch) – Aurangabad (WIRC) and Salem (SIAC)

ICAI And Its Members

1. Code of Ethics:

The Ethical Standards Board has given answers to some of the questions relating to Ethical issues at Pages 1364-66 of CA Journal for March, 2013. Some of these issues are as under:-

(i) Whether the statutory auditors consisting of ten or more members can conduct the branch audits of the same company?

Response

The Council has prescribed certain self-regulatory measures, in order to ensure a healthy growth of the profession and an equitable flow of professional work among the members. One of the recommendations of this nature is that the branch audits of a company should not be conducted by its statutory auditors consisting of ten or more members, but should be conducted by the local firms of auditors consisting of less than ten members. This should not be understood to mean any restriction on the right of the statutory auditors to have access over branch accounts conferred under the Companies Act, 1956. This restriction may not apply in the following cases:

(a) where the accounting records of the branches are maintained at the head office of the respective companies; and
(b) where significant operations of an undertaking or a company are carried out at its branch office.

(ii) Is there any ceiling on the fees to be accepted from one company?

Response

To ensure that the professional independence of a member in full-time or part-time practice does not appear to be jeopardised, he should, as far as possible, take care to see that the professional fees for audit and other services received by the firm in which he is a partner, by him and his partners individually and by firm or firms in which he or his partner are partners from one or more clients or companies under the same management, does not exceed 40% of the gross annual fees of the firm, firms and partners referred to above. ‘Companies under the same management” here would refer to the definition of this expression as provided in Section 370(1-B) of the Companies Act, 1956. Further, such ceiling on the gross annual professional fees of a member would be applicable, where such fees does not exceed Rs. 2 lakh in respect of a member or firm, including fees received by the member or firm for other services rendered through the medium of a different firm or firms in which such member or firm may be a partner or proprietor. No such ceiling on the gross annual professional fees of a member would be applicable in the case of audit of government companies, public undertakings, nationalised banks, public financial institutions or where appointments of auditors are made by the Government.

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

2. EAC Opinion Accounting for common fixed assets constructed for a project under progress:

Facts: A Government of India company (Company) is engaged in the construction and operation of thermal power plants in the country. The company is involved in the construction of power projects. Every project has a defined capacity expressed in terms of Megawatts (MWs) and such capacity is further divided into stages and units. The company envisages construction of power projects that are around 1000/1320/2000/3000 MW in capacity. These normally consist of individual generating units of 500/660 MW capacity. The capacities are built in clusters called stages. Generally, each stage may consist of two or more units and power projects are constructed in phased manner. In coal based thermal power plants, coal is a basic fuel which is used in the process of generation of electricity. To cater to the coal requirement of a generating unit, a coal handling plant comprising track hopper, crusher house, conveyor and coal stock yard is constructed. Through the coal handling system, coal is supplied to the two different generating units of the first stage of the project. For the construction of coal handling system for two generating units of a stage, a single contract is awarded. The total package includes (a) construction of coal handling plant including conveyor system and the mechanical structure and (b) construction of separate coal supply arrangements beyond the crusher house to different generating units of the project. Thus, the coal handling plant is a common system catering to all generating units of the first stage of the power project. As per Accounting Standard (AS) 10, “Accounting for Fixed Assets” the company, on commercial declaration of the first unit of stage (Unit I) of the project has capitalised the cost of systems which have started functioning (including the cost of coal handling plant) alongwith the cost of first unit. As the cost of the portion of cold handling plant declared commercial is not directly available, the cost of coal handling system is technically estimated/assessed by a committee comprising members from Engineering, Finance and Erection Department of the project.

Query:

On these facts, opinion of EAC has been sought on the following issues: (i) whether the accounting treatment followed by the company for capitalisation of coal handling system on technical assessment/ estimates alongwith Unit ONE is in order? (ii) If answer to (i) is in negative, on what basis, the cost of coal handling system declared commercial alongwith Unit One should be capitalised?

EAC Opinion: After considering paragraphs 9.1 and 9.2 as well as 10.1 of AS-10, the Committee has expressed the view that the coal handling plant handles and processes the fuel required for operation of generating units. Thus, in the Company’s case, power generating units and coal handling system can be considered as composite plant which would be ready for its intended use only when either Unit One or Unit Two and coal handling system to the extent related to the relevant unit, are ready for commercial production. Therefore, those parts of composite plant which are ready for their intended use and can be operated independently of the remaining parts should be considered to be ready for commencement of commercial production/ intended use. Accordingly, in the Company’s case, coal handling system, although under construction but since substantially complete, such that Unit One is ready to commence commercial production, it would be correct to capitalise that cost of the coal handling plant which is necessary for making Unit One operational when unit One is ready to commence commercial production. As regards using technical estimates for determining the cost of related portion of coal handling plant which is to be capitalised, the Committee is of the view that technical estimates can be used provided these approximate the cost of such system reliably. [Refer pages 1402 to 1405 of C. A. Journal of March, 2013 ]

3. New Office Bearers of WIRC The following Office Bearers of WIRC are elected for 2013-14

(i) Chairman: CA Mangesh Kinare,
(ii) Vice Chairman: CA Parag Raval,
(iii) Secretary: CA Neel Majithia, and
(iv) Treasurer: CA Priti Savla. We congratulate the new team of WIRC and wish them successful year in office.

4. Chairman – Vice Chairman of some Important Committees of Central Council (Refer Pages 1479-1484 of CA Journal for March, 2013)

(i) Executive, Examination, Finance, Disciplinary Committees & Editorial Board

Chairman : CA Subodhkumar Agarwal, President
Vice Chairman : CA K Raghu, Vice President

(ii) Other Committees:

5. Revised Form of Audit Reports:
Audit Reports for Financial Statements for the periods beginning on or after 01-04-2012 have to be issued in the Revised format as suggested in the Revised Standard on Auditing (SA) 700 – Page 1485 of CA Journal for March, 2013.

6. ICAI News
(Note: Page Nos. given below are from C.A. Journal for March, 2013)

(i) Standard on Internal Audit (SIA) 18 – Related Parties

This Standard is published on Pages 1491-1494

(ii)    New Publications of ICAI
(a)    Compilation of Registration Provisions under VAT Laws of different States (Page 1489)
(b)    Technical Guide on Accounting Issues in Retail Sector (P. 1489)

(iii)    PCE – IPCE Results – November 2012 Examination (Page 1349)
(a)    PCE: Both Groups 320(5.45%), Group I 1943 (22.17%) and Group II 1870 (14.78%)
(b)    IPCE Both Groups 5720 (11.15%), Group I 25269 (25.14%) and Group II 20326 (21.13%)

ICAI and its members

1. Code of Ethics

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

(i) Issue No: 1

What is the Conceptual Framework approach?

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

What is Ethical Conflict Resolution?

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

What is Independence?

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

What is the conceptual Framework to Independence?

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:-

(ii) Salary Package

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.

4. ICAI News:

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

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

ICAI has suggested making it mandatory for companies to report foreign currency gains and losses separately in their financial statements. Companies will now have to separately state the impact of foreign exchange fluctuations in their balance sheets. This change will help a reader of the financial statement understand as to how much impact the foreign currency has had on the company. The move will help avoid divergence in accounting and bring more transparency in reporting of numbers. From now on, companies should show the Foreign Currency Monetary Item Translation Difference Account (FCMITDA) separately, under which they have to show foreign currency fluctuations “under the ‘Equity and Liabilities’ side of the balance sheet under the head ‘Reserve and Surplus’” These changes were approved by the Council. Further, ICAI has suggested changes in reporting of gains or losses with regard to hedging instruments related to long term foreign currency items. It is suggested that Exchange difference related to the hedging instrument obtained to cover the exchange risk on long term foreign currency monetary items should also be separately shown in the balance sheet.

(ii) ICAI Publications

(a) Education Material on Indian Accounting Standard (Ind AS) Revenue (P 1724)

(b) Technical Guide on Internal Audit of Textile Industry (P.1737)

(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).

ICAI and its Members

1. Code of Ethics:

The Ethical Standards Board of ICAI has given answers to some of the Ethical Issues on pages 888-889 of the CA Journal of December, 2012. Some of these issues are as under:-

(i) Issue: Can a Chartered Accountant in Service accept or agree to accept any part of fees, profits or gains from a lawyer, a Chartered Accountant or broker engaged by such company, firm or person or agent or customer of such company, firm or person by way of commission or gratification?

Comment: Clause (2) of Part II of First Schedule to the CA Act prohibits a member in service from accepting or agreeing to accept any part of fees, profits or gains from a lawyer, a Chartered Accountant or broker engaged by such company, firm or person or agent or customer of such company, firm or person by way of commission or gratification.

(ii) Issue: Whether a member of the Institute shall be deemed to be guilty of professional misconduct, if he includes in any statement, return or form to be submitted to the Council any particulars knowing to be false?

Comment: As per Clause (3) of Part III of the First Schedule to the CA Act, a member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct if he includes in any statement, return or form to be submitted to the Council, any particulars knowing them to be false.

(iii) Issue : Whether a member of the Institute shall be deemed to be guilty of professional misconduct, if he does not supply the information called for, or does not comply with the requirements asked for, by the Institute?

Comment: A member of the Institute shall be deemed to be guilty of professional misconduct if he does not supply the information called for, or does not comply with the requirements asked for by the Institute. (As per clause 2 of part-III of the First Schedule to the CA Act)

(iv) Issue: Whether a joint auditor will be responsible for the work done by other joint auditor?

Comment : Council direction under Clause (2) of Part 1 of the Second Schedule to the CA Act prescribes that in respect of audit work divided among the joint auditors, each joint auditor is responsible only for the work allocated to him, whether or not he has prepared a separate report on the work performed by him. On the other hand, all the joint auditors are jointly and severally responsible:-

(a) in respect of the audit work which is not divided among the joint auditors and is carried out by all of them;

(b) in respect of decisions taken by all the joint auditors concerning the nature, timing or extent of the audit procedures to be performed by any of the joint auditors. It may, however, be clarified that all the joint auditors are responsible only in respect of the appropriateness of the decisions concerning the nature, timing or extent of the audit procedures agreed upon among them; proper execution of these audit procedures is the separate and specific responsibility of the joint auditor concerned;

(c) in respect of matters which are bought to the notice of the joint auditors by any one of them and on which there is an agreement among the joint auditors;

(d) for examining that the financial statements of the entity comply with the disclosure requirements of the relevant statute; and

(e) for ensuring that the audit report complies with the requirements of the relevant statute.

(v) Issue : Whether the member in practice can permit his name or the name of his firm to be used in connection with an estimate of earnings contingent upon future transactions, in a manner which may lead to the belief that he vouches for the accuracy of the forecast?

Comment : Under Clause 3 of Part-I of the Second Schedule of the CA Act, a member in practice cannot permit his name or the name of his firm to be used in connection with an estimate of earnings contingent upon future transactions, in a manner which may lead to the belief that he vouches for the accuracy of the forecast. However, the Council has decided that a Chartered Accountant can participate in the preparation of profit or financial forecasts and can review them, provided he indicates clearly in his report the sources of information, the basis of forecasts and also the major assumptions made in arriving at the forecasts and so long as he does not vouch for the accuracy of the forecasts.

2. Employee Benefits- (AS-15) – FRRB Comments on Non-compliances

Financial Reporting Review Board (FRRB) of ICAI has reviewed published accounts of certain companies. It has noticed non-compliances by some companies with regard to disclosure requirements under AS-15. These comments are at Page 999 of CA Journal for December, 2012. Some of these comments are as under.

(i) Enterprises often state in their accounting policies that “Provision for gratuity is made in the accounts, considering the balance sheet date as the notional date of retirement”. It was noted that as per AS 15, the provision for gratuity should be determined through actuarial valuation which should be based on assumptions that are not excessively conservative and should reflect the economic relationship considering the factors such as inflation, salary increase, the return on plan and discount rates. It was viewed that the stated policy indicates that provision for gratuity is determined by the company based on the assumption that all its employees retire on the balance sheet date, which is an excessively conservative assumption. Since it does not consider actuarial risk, it was viewed that actuarial valuation is not followed by the company while valuing its liability towards gratuity, which is against AS 15.

(ii) Accounting policy on termination benefits of a company states that payments under Voluntary Retirement Scheme are recognised in the profit and loss account of the year in which such payments are effected. It was viewed that considering the provision given under paragraph 134 of AS 15, an enterprise is required to provide for termination benefits on accrual basis. Accordingly, the stated accounting policy is observed to be against the requirements of AS 15 as well as Section 209(3) (b) of Companies Act, 1956.

(iii) Certain companies have adopted an accounting policy on employee benefits under which any payment to defined contribution scheme is charged as expense, as they fall due. It was viewed that as per paragraph 45 of AS 15, the expense of defined contribution plan should be recognised for each period of service rendered by the employees. However, the accounting policy states that such expense has been recognised by the enterprise when it falls due. It was viewed that such policy does not clearly indicate as to whether the contribution so made, is the appropriate accrual of liability or not. It is essential because the contribution in excess of what is due is to be recognised as an asset and contribution falling short is to be recognised as liability.

3. Empanelment of CA Firms for 2013-14

The following Notification issued by C and AG office is published on P. 1005 of CA Journal of December, 2012.

Applications are invited online from the firms of Chartered Accountants who intend to be empanelled with C & G office for appointment as auditors of Government Companies/Corporations for the year 2013-2014. The format of application will be available on C & G website: www.cag.gov. in from 1st January, 2013 to 15th February, 2013. Chartered Accountant firms can apply/update the data showing the status of their firm as on 1st January, 2013 and generate online acknowledgement letter for the year. They are also required to submit related documents (to be notified in this office website) to this office by 31st March, 2013. Only the Chartered Accountant firms who have generated online acknowledgement letter for the year 2013 -2014 and submitted the documents before the due date will be considered for empanelment.

4. Tax Accounting Standards

The committee appointed by CBDT to formulate Accounting Standards for the purposes of Notification u/s. 145(2) of the Income tax Act has submitted its report on 26-10-2012. This committee has recommended Accounting Standards on the following 14 issues. These Accounting Standards will be called “Tax Accounting Standards” (TAS). The committee has recommended that TAS, as notified u/s. 145(2), will apply only to the computation of Taxable Income and the assessee will not be required to maintain books of accounts in accordance with the requirements of TAS. This will mean that the assessee will have to follow Accounting Standards issued by ICAI for preparing the financial statements and TAS for computing Taxable Income under the Income tax Act. If there is a conflict between ICAI issued AS and TAS, it is stated that TAS will apply for computing the Taxable Income. The committee has also recommended that for ensuring compliance with the provisions of TAS, Tax Audit Report u/s. 44AB will be modified and it will be the duty of the Tax Auditor to certify that the computation of taxable income has been made by the assessee in accordance with the provisions of TAS. In other words, the Tax Auditor will have to certify the correctness of taxable income. This will place additional responsibility on practicing Chartered Accountants when these TAS are notified u/s. 145(2).

List of Recommended TAS

TAS

Corresponding
AS

Topic

Disclosure Accounting Policies

Valuation of Inventories

Events Occurring after the

Previous Year

Prior Period Items

Construction contracts

Revenue Recognition

Accounting for Tangible Fixed

Assets

The Effects of Changes in

Foreign Exchange Rates

Government Grants

Securities

Borrowing Costs

Leases

Intangible Assets

Provisions, Contingent Liabilities

And Contingent Assets

ICAI and its members

1. Some Ethical Issues

The Ethical Standards Board of ICAI has given answers to some Ethical Issues as under on Pages 694 and 696.

Issue No.1

Whether the information contained in the website of Chartered Accountants and/or Chartered Accountants’ firm can be circulated on their own or through e-mail or by any other mode or technique?

Response

Sub-paras (3) & (4) of para (m) in the Code of Ethics under commentary to Clause (6) of Part 1 of the first schedule to the C.A. Act prescribes that Chartered Accountants and/or Chartered Accountants’ firms should ensure that none of the information contained in the website be circulated on their own or through E-mail or by any other mode or technique except on a specified “pull” request. ‘Chartered Accountants’ firms would ensure that their websites are run on a “pull” model and not a “push model” of the technology to ensure that any person who wishes to locate the Chartered Accountants or Chartered Accountants’ firms would only have access to the information and the information should be provided only on the basis of specific “pull” request.

(ii) Issue No.2

Can a member put up his photograph on the website?

Response

Revised sub-para (8) of para (m) in the Code of Ethics under commentary to clause (6) of Part 1 of the First Schedule to the C.A. Act provides that display of passport size photograph is permitted.

(iii) Issue No.3

Whether a Chartered Accountant in practice can use expressions like Income Tax Consultant. Cost Accountant, Company Secretary, Cost Consultant or a Management Consultant?

Response

Council direction under Clause (7) of Part 1 of the First schedule to the C.A. Act prescribes that it is improper for a Chartered Accountant to state on his professional documents that he is a Income tax consultant, Cost Accountant , Company Secretary, Cost Consultant, whereas it is permitted to mention his degrees.

(iv) Issue No.4

Can a Chartered Accountant in practice give the date of setting up of the practice or date of establishment on the letterheads and other professional documents, etc.?

Response

Council direction under Clause (7) of Part 1 of the First Schedule to the C.A. Act prescribes that the date of setting up of the firm should not be mentioned on the letterheads and professional documents, etc. However, in the website, the year of establishment can be given on a specific “pull” request.

(v) Issue No.5

Whether a Chartered Accountant in practice can use the designation ‘Corporate Lawyer’?

Response

A Chartered Accountant in practice is not permitted to use the designation ‘Corporate Lawyer’.

2. ICAI Council Affairs

Attention is invited to the following Times of India Newspaper Report of 02-11-2013 from Chennai. Let us hope that the council issues detailed clarification on the issue.

“Holding that all is not well with the functioning of the Institute of Chartered Accountants of India (ICAI)the Madras High Court has decided to hear the CBI and the Chief Vigilance Commission (CVC) before passing Orders on PIL seeking CBI/CVC probe into the irregularities in the establishment of Rs. 97.5 crore centre of excellence at Nagpur.

“The ICAI is supposed to be the apex board to regulate the affairs of the body and monitor the functioning of its members. It also exercises disciplinary jurisdiction over its members. In case the apex body itself violates financial discipline, it is really a serious matter,” observed justice K. K. Sasidharan on Wednesday.

“Records indicate that all is not well with the statutory body. The council members have expressed their strong views and the President and Secretary on account of entering into certain financial dealing without taking the council into confidence. The transaction is not confined to the centre of excellence at Nagpur. There are other land dealings also involving substantial amount,” the judge said.

In his PIL, V. Venkata Siva Kumar wanted the court to order a probe by the CBI or the CVC into the project, and ‘unravel irregularities, conspiracy and criminal breach of trust’ committed by the president and other office bearers of the ICAI.

Minutes of the meeting revealed that the ICAI secretary had told the members that CVC regulations were not applicable to ICAI. The Nagpur land deal was cancelled due to protests by members.”

3. EAC Opinion

Accounting treatment of share application money pending for allotment invested by the holding company in subsidiaries:

Facts:
Consequent to State Electricity Reforms Transfer Scheme 2000. the erstwhile State Electricity Board (SEB) was reorganised into three Corporations namely, State Power Corporation Ltd. (SPCL), State Vidyut Utpadan Nigam Ltd. And State Jal Vidyut Ltd. we.f. 14-01-2000. The City Electricity Supply Area was separated as a subsidiary company of SPCL and christened as the City Electricity Supply Company Limited (CESCO) vide State Transfer of K Zone Electricity Distribution Undertaking Scheme, 2000.

SPCL (hereinafter referred to as ‘the Company’) is dealing with bulk purchase and sale of electrical power in the State and had a turnover of Rs. 12,197.66 crore in the financial year (F.Y)) 2007- 08. It purchases electricity from various power generation utilities. Further, it sells the electrical power to its wholly owned subsidiary companies holding distribution license under the Electricity Act, 2003. The company is a Government company and is holding 100% shares in its subsidiaries, which are also Government companies as ‘Investments’.

The funds received from the State Government are invested by the company in the subsidiary distribution companies as ‘share application money’. The allotment process from share application money to share capital rests with the respective subsidiary distribution companies. Pending allotment of share application money, these subsidiary distribution companies have utilised such amounts in the creation of capital assets.

The subsidiary distribution companies have negative net worth and, accordingly, the auditors advised the company to make suitable provisions in the annual accounts for diminution in the value of investments in accordance with Accountant Standard (AS) 13, “Accounting for Investments” considering that such investments in subsidiary distribution companies was made as long term investment.

Query:
Now, the company has sought the opinion of the Expert Advisory Committee on the issues: (i) Whether share application money is to be considered for making provision for diminution in the value of investments even though the shares for the same are yet to be allotted. (ii) Whether share application money, in respect of which shares are allotted subsequent to the end of the financial year but before the adoption of accounts of the company, should be considered as share capital for the purpose of making the provision for diminution in the value of investments. (iii) For making provision for diminution in the value of investments, whether the company can consider the fact that the revaluation of assets under progress and that the fair market value of assets would be higher than the historical value/cost of assets?

EAC Opinion:

The Committee notes that the erstwhile SEB was restructured into three corporations, one of which is the company. Further, its electricity distribution business has been divested to its wholly owned subsidiary companies. The company as well as its subsidiary companies are Government companies. The company has invested the funds received from the State Government as share application money in subsidiary companies, some of which is pending for allotment. In this regard the issue raised is whether the provision for diminution in the value of investments should made against the share application money, even though the shares for the same are yet to be allotted as on the balance sheet date. The Committee notes the definition of the term ‘Investments’ as defined in AS13, and ‘Advance’ as defined in the ‘Guidance Note on Terms Used in Financial Statements’, issued by ICAI.

After considering the above, the Committee is of the view that although the share application money pending for allotment may not give any benefits to the company (neither dividend, interest, rental nor capital appreciation) till shares are allotted against it to the company. However, since the money has been given to the subsidiary companies, this application money for shares may be considered to be held ‘for other benefits’. Further, the Committee notes that the money so provided has been utilised by the companies for acquisition of capital assets and all the companies being State Government companies operate as per the instructions of the State Government. Further, it indicates existence of a ‘contract of contribution’ to share capital against which shares have been allotted after the balance sheet date but before the approval of accounts. The Committee is therefore, of the view that all this indicates that irrespective of the fact that whether shares are allotted to the company or not, the money given as share application money would not be refundable to the company. Therefore, considering ‘substance over form’, the Committee is of the view that these are of the nature of long term investments. Accordingly, provision for diminution in the value of investments other than temporary should be considered against the same. Further, the Committee is the view that it should be disclosed in the financial statements with an appropriate nomenclature and notes to accounts so as to give the correct picture of the situation, viz., shares are yet to be allotted against these investments. The Committee is also of the view tht even if shares are allotted against such application money after the balance sheet date, but before adoption of accounts, there is no need for disclosing it as ‘shares’ till the date of allotment, as it is taking place in the subsequent year. However, additional disclosures regarding allotment (which takes place in subsequent year before adoption of accounts) may be made in the financial statements. (pages 720-724 of C.A. Journal of November, 2013)

4. ICAI News

(Note: Page Nos. given below are from C.A. Journal of November, 2013)

(i) Announcement:

All the members of the Institute of Chartered Accountants of India (ICAI) are hereby informed that in terms of the authority granted under Section 30(1)(i) of the C.A. Act, the Council of ICAI has prescribed Regulation 47 of the C.A. Regulations, 1988, which reads as under:

“No amount shall be charged from, or be payable by, an articled assistant or any other person on his behalf, directly or indirectly, whether by way of premium or as loan or deposit or in any other form in connection with his engagement as an articled assistant.”

In view of the above, charging of premium from articled assistants is misconduct under the provisions of C.A. Act and punishable u/s. 21B(3) of the C.A. Act (page 696)

(ii) Health Insurance Scheme for Members of ICAI

ICAI has taken a major initiative for arranging in the form of specially designed Health Insurance scheme with the special features like no health check-up, no age limit & entry barrier, premium discount in lieu of cumulative bonus, 5% discount in premium to be paid to the Insurance company, where the Member has not preferred any claim in the expiring policy in case of renewal of the policy, wide coverage for pre-existing diseases etc. for Members & Students of ICAI. The scheme has been in force from 12th March, 2013 for the Members of ICAI. Please visit http:/icai. newindia.co.in, to apply online for Insurance policy and to view other formalities as well as details about the aforesaid insurance scheme. (page 804)

(iii) Professional Indemnity Insurance for Members & CA Firms of ICAI

ICAI has arranged insurance protection for members in practice/firms in the form of specially designed professional indemnity insurance at a reasonable premium i.e. 85% discount in market rate. The scheme has been effective from 12th March, 2013 for the Members in practice/ Firms of the ICAI.

Members and CA firms desirous to avail the benefits of the aforesaid scheme may please visit http:/icai.newindia. co.in & online solution for the same. (page 804)

(iv) 64th Annual Report and Accounts of ICAI

The 64th Annual Report of the Council and the Annual Accounts for the year 2012-13 have been published in the Gazettee of India and will shortly be hosted on the website of the institute – www. icai.org. The same is being e-mailed to the members whose e-mail ids are on the record of the Institute.

In this connection, members who have not furnished their e-mail ids are requested to provide their e-mail ids to enable the said report being sent to them also. Further, hard copy of the above Report would also be forwarded to those desirous of the same. Accordingly, members desirous of a hard copy of the above Report may write, giving their membership number and complete postal address, to Shri G. Ranganathan, Deputy Secretary (e-mail: councilaffairs@icai.in). (page 806)

(v) New ICAI Publication

Compendium of Opinions (Vol XXXI) (Page 813)

ICAI and its members

1. Conversion of C.A. Firm into LLP

The Ministry of Corporate Affairs has issued a General Circular (F.No.1/10 2012- CL-VI) giving the following clarifications (Refer P.1853 of C.A. Journal for June, 2013).

(i) The provisions of sections 55 and 58 of the LLP Act, 2008 read with Second Schedule thereto, inter-alia provide for requirements in respect of convertion of a single partnership firm into a single LLP. The LLP Act, 2008, does not provide for conversation of two or more firms into a single LLP.

(ii) The provisions of section 58(4) (b) of the LLP Act, 2008 provide that on convertion of a firm into an LLP, as per the provisions of the said Act, all property, assets, interests, rights, privileges, liabilities, obligations relating to the firm and the whole of the undertaking of the firm shall be transferred to and shall vest in the LLP without further assurance, act or deed. Accordingly, if a CA audit firm, being an auditor in a company under the companies Act, 1956, gets converted into an LLP after complying with relevant provisions of the LLP Act, 2008, then such an LLP, in accordance with the provisions of section 58(4)(b) of the LLP Act, 2008 would be deemed to be the auditor of the said company. Reference is also drawn to the notification number SO 1152(E) dated 23rd May, 2011 and General Circular 30A dated 26th May, 2011 of the Ministry in this regard. The relevant appointee company may take note of such change in status of the auditor through a resolution of the Board. The concerned stakeholders, Registrar of Companies, and the appointee companies should take note of the above clarifications and comply accordingly.

In the President’s message to the Members on page 1820 of CA Journal, it is stated that the CA Firms may now convert into LLPs. However, he has not clarified whether under the Companies Act, 1956, a LLP can audit the accounts of a company. In the P. N. Shah H. N. Motiwalla Chartered Accountants icai and its members Companies Bill, 2012, as passed by the Lok Sabha in December, 2012, there is a specific provision in Section 139 that LLP, in which majority of partners are Chartered Accountants, can be appointed as statutory auditor. There is no similar provision in the existing Companies Act.

Further, there is no exemption from Capital Gains Tax if a CA Firm is converted into LLP. Sections 47(xiii) and 47(x iii b) of the Income tax Act provide for exemption in cases of conversion of a Firm into company or conversion of a company into LLP subject to certain conditions. There is no similar provision giving exemption to a Firm converting itself into LLP. Therefore, it is not clear as to how the above notification of MCA can be put into practice.

2. General Management and Communication Skills. ( GMCS)

On page 1821 of CA Journal for June, 2013, ICAI has made the following announcement for students.

ICAI has always been conscious of the fact that the students pursuing CA Course who are potential members of the profession, must undergo the rigorous practical training and also develop an all-round personality so as to meet the contemporary challenges of the economic environment. As a consequence, ICAI had recently implemented the decision to impart GMCS Course in two parts. The Board of Studies has completely revised the syllabus for both the courses and brought out the new training material both for the students and the trainers. A number of programmers are also being organised for the trainers throughout the country. This would also ensure the standardisation in the delivery of the course throughout the country. The GMCS fee has been increased from Rs.4,000/- to Rs.5,500/- per participant per course, to be conducted from 1st July, 2013 onwards.

3. Recognition of Expenditure incurred on Branding and Advertisement.

EAC opinion

Facts :
The company is engaged in the business of news paper publishing and radio broadcasting. The company operates through the different brand names. The company is one of the leading media houses of the country. Being in the media industry, the brand/goodwill of the products of the company is of utmost importance as that is the major driving factor behind the growth. To become successful, it is very important to build the strong goodwill in the market, particularly in the times of slow-down in the economy.

The Company has stated that during the efforts to build the brand/goodwill, the company undertakes various activities. The company incurs substantial amount of expenditure on these activities which are necessary to build the brand in public, which is the key to success in the business. The benefits of such expenses are accrued to the company for a period of more than one year and sometimes, these extend to a longer period. The goodwill/brand developed through these activities also helps the company to attract new customers for long term.

Query :
The company has sought the opinion of the Expert Advisory Committee (EAC) on deferring and amortising the branding expenses over the future years instead of charging the same in the year when these were incurred.

Opinion:
The Committee notes the definition of the term ‘asset’ as contained in paragraph 49 of the ‘Framework for the Preparation and Presentation of Financial Statements’, issued by the Institute of Chartered Accountants of India, and after considering paragraphs 35, 36, 50, 51 and 56 of AS 26, it is of the view that taking into account the specific provisions of the Standard, the said expenditure on branding and advertising cannot be recognised as an asset, though it may be providing future economic benefits to the enterprise. Accordingly, such expenditure should be charged off to the statement of profit and loss of the period in which it is incurred. [Refer Pages 1865 and 1866 of C.A. Journal for June, 2013.]

4. ICAI News

(Note: Page Numbers given below are from CA Journal of June, 2013)

(i) Insurance Protection for Members and CA Fir ms.

ICAI has arranged insurance protection for members in practice/firms in the form of specially designed professional indemnity insurance at a reasonable premium i.e. 85% discount in market rate. The scheme has become effective from 12th March, 2013 for the Members in practice/Firms of the ICAI.

The policy covers all sums which the insured professional becomes legally liable to pay as damages to third party in respect of any error and/or omission on his/her part committed whilst rendering professional service. Legal cost and expenses incurred in defense of the case, with the prior consent of the insurance company, are also payable, subject to the overall limit of indemnity selected.

Only civil liability claims are covered. Any liability arising out of any criminal act or act committed in violation of any law or ordinance is not covered.

(ii) New Branches of ICAI

The following five Branches of ICAI have been established. With this addition, there are 133 Branches of ICAI in India now. (P. 1961-1963)

(a) Kishangarh (Rajasthan) – CIRC.
(b) Jhansi (UP) – CIRC
(c) Chittorgah (Rajasthan) – CIRC
(d) Satara (Maharashtra) – WIRC
(e) Navsari (Maharashtra) – WIRC

(iii) New Publications of ICAI

(a) Guidance Note on Report u/s 92E of the Income tax Act (Revised)
(b) Technical Guide to Audit in a Shared Service Centre Structure (P.1970)
(c) Technical Guide on Internal Audit of Pharmaceutical Industry (P 1971).

ICAI and its members

1. Code of Ethics:

The Ethical Standards Board of ICAI has given answers to some ethical issues raised by our members. These are published on pages 226 to 228 of C. A. Journal for August, 2013. Some of these issues are as under:

Issue:

What is Code of Ethics?

Every profession has its own Code of Ethics. The Chartered Accountants Act, 1949 has been enacted by Parliament for the regulation of the profession of Chartered Accountants and for the purpose of carrying out the object of the Act, the Chartered Accountants Regulations, 1988 have been enacted. The Act has two schedules i.e., First Schedule and Second Schedule.

The first Schedule has four parts:

Part I – Professional misconduct in relation to Chartered Accountants in Practice.

Part II – Professional misconduct in relation to Members of the Institute in Service.

Part III – Professional misconduct in relation to Members of the Institute generally.

Part IV – Other Misconduct in relation to the Members of the Institute generally.

The Second Schedule has three parts:

Part I – Professional misconduct in relation to Chartered Accountants in Practice.

Part II – Professional misconduct in relation to Members of the Institute generally.

Part III – Other misconduct in relation to members of the Institute generally

These two schedules along with the decisions of the Courts on profession misconducts, decisions, directions, guidelines, statement, clarifications and also interpretations of the Council on the various clauses of these two schedules constitute the Code of Ethics for the accountancy profession.

Issue:

What is Professional or other misconduct?

Section 2 of the Act defines professional or other misconduct as follows:

For the purposes of this Act, the expression “professional or other misconduct” shall be deemed to include any act or omission specified in any of the Schedules, but nothing in this section shall be constructed to limit or abridged in any way the power conferred or duty cast on the Director (Discipline) u/s.s. (1) of Section 21 to inquire into the conduct of any members of the Institute under any other circumstances.

What constitutes “misconduct under any other circumstances” has to be determined on a caseto- case basis keeping in view the facts of the circumstances of each case. Fraud, intention to deceive and committing an act which affects the public or society at large could be in the ambit of such misconduct. Following are few examples of “misconduct under any other circumstances” by a member:

1. Conviction by a competent Court for an offence involving moral turpitude punishable with imprisonment or for an offence not of a technical nature committed by a member in his professional capacity.

2. Retention of books and documents of the client and failure to return these to the client on request without a reasonable cause.

3. Material misrepresentation e.g. misrepresenting to a firm, while seeking employment as an accountant, that he has worked for three years as a senior assistant with another firm.

4. Publishing an advertisement in a newspaper with mala fide intention to malign any person.

5. Using objectionable, derogatory and abusive language or/and making irrelevant, incoherent, irresponsible and insane statements in his correspondence with a person.

Issue:
Whether a member in practice is permitted to undertake the management of NRI funds?

No, the 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 practicing members of the Institute.

Issue:

Can a Chartered Accountant provide ‘Portfolio Management Services’ (PMS) as part of CA practice?

No, the Explanation to Clause (xix) of the definition of “Management Consultancy and other Services” expressly bars the activities of broking, underwriting and Portfolio Management.

Issue:

Whether a Chartered Accountant in practice is not required to obtain any trade license for practicing?

No, a Chartered Accountant in practice is not required to obtain any trade license for practicing as a professional. The certificate issued by the Institute is the only requirement to practice as a Chartered Accountant.

Issue:

Can a Chartered Accountant in practice work as a Collection Agent/Recovery Agent?

No, 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 “Management Consultancy and other Services”.

2. EAC Opinion:

Adjustment of losses on Sale of Fixed Assets, Writing-Off Inventory and Doubtful receivables against Capital Reserves Arising Out of Acquisition of Business, Capital Redemption Reserves and Revaluation Reserves.

Facts
A company (hereinafter referred to as ‘the company’) is a 50:50 joint venture between two companies. The company is in the business of manufacture and sale of power/telecom cable joining kits, transformers, gas meters, energy meters & corrosion protection products and providing services. During the financial year 2010- 11 (i.e., w.e.f. 24th September, 2010), the company acquired the energy business, consisting of manufacture and sale of connectors, fittings and insulation products from another company, ‘A’ Pvt. Ltd, Bangalore, on a going concern basis under slump sale agreement. Based on valuation report from an independent valuer, the company has recognised fixed assets, inventories and liabilities at fair value and a capital reserve of Rs. 1476.72 lakh being excess of assets acquired over purchase consideration paid. A part from the above-mentioned capital reserve, the company also has capital redemption reserve and revaluation reserve in its books as on 31-03- 2011. This break-up is as follows:

Rs. in lakh

Capital reserve created as above 1,476.72
Revaluation reserve 82.17
Capital redemption reserve 250.00

1,808.89

2. During the financial year 2012-13, the company has passed the following two entries by debiting the above capital reserve:

(i) Non-moving inventory acquired out of the above acquisition amounting to Rs. 1,06,813.10 written off by debiting the above capital reserve.
(ii) Fixed assets acquired out of the above acquisition have been scrapped and loss amounting to Rs. 1,04,117.81 has been debited to the above capital reserve.

Query
In this context, the querist has sought the opinion of the EAC as to whether the correct accounting treatment has been applied by the company by debiting the above-mentioned reserves as per the provisions of the Accounting Standards and the Companies Act or any other law?

Opinion:
The Committee noted that the basic issue raised by the querist relates to adjustment of losses on sale/disposal of fixed assets, writing-off inventories and old and doubtful receivables against capital reserves created from business acquisition, and capital redemption reserves and revaluation reserves already standing in the books of the company.

The Committee notes that the Companies Act, 1956, does not specifically contain any provision for utilisation of capital reserve and revaluation reserve, Further, the Companies Act, 1956, does not envisage utilisation of capital redemption reserve for writing-off losses on sale of fixed assets as well as for writing-off inventory and doubtful receivables.

As regards accounting for non-moving inventories, the Committee is of the view that these represent obsolescence of inventories which would be reflected in the determination of net realisable value of the inventories. In the context of writing down the inventories to their net realisable value, the Committee after considering paragraphs 5 and 12 of Accounting Standard (AS) 5, ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, notified under the ‘Rules’, is of the view that write-off of non-moving inventory should be included in the statement of profit and loss.

Further, as regards write-off of inventories due to shortages observed in the acquisition of business and writing off of old and doubtful receivables, the Committee is of the view that these represent losses. The Committee after considering paragraphs of the Framework for the Preparation and Presentation of Financial Statements, issued by the Institute of Chartered Accountants of India, is of the view that losses also represent expenses and accordingly, these should be charged to the statement of profit and loss as per the requirements of paragraph 5 of AS 5.

Accordingly, the Committee is of the view that any write-off of inventories and receivables cannot be adjusted against capital reserves, capital redemption reserves and revaluation reserves.

[Please refer to pages 263 to 265 of C.A. Journal, August vbn, 2013]

3. ICAI News:

a) Non-applicability of SA 700 on Tax Audit Reports:

The members are well aware that all audit reports in respect of audits of financial statements for the period beginning on or after 1st April, 2012 have to be issued in accordance with the requirement of SA 700 (Revised) – “Forming on opinion and Reporting on Financial Statements”. The ICAI has clarified that since all the tax audit reports i.e., Form No./3CA/3CB are now mandatorily required to be filed online and that format of tax audit report is prescribed by the Central Government requires suitable changes in the forms, the applicability of SA 700 (Revised) on tax audit report is deferred by one year.

[Refer Page 203 & 204 of C. A. Journal, August, 2013]

b) Examination Results:

Results of C. A. final and CPT examinations held in May, 2013 have been declared in July 2013. The details of percentage of candidates passed along with percentage are given below:

[Refer pages 329 & 330 of C. A. Journal, August, 2013]

c) Certificate course on concurrent Audit of Banks:

Members can take advantage of certificate course conducted by ICAI on Concurrent Audit of banks

[For details, refer Page 341 of C. A. Journal, August, 2013]

d) New ICAI Publications:

i) Compendium of Implementation Guides to Engagements and Quality Control Standard

ii) Implementation Guide to Standard on Auditing (SA) 501 “Audit Evidence – Specific Consideration for Selected Items”

iii) Compendium of Technical Guides on Internal Audit (Five volumes)

iv) Compendium of Standards on Internal Audit

[Please refer pages 347 & 348 of C.A. Journal, August, 2013]

ICAI and its members

1. Code of ethics

The Ethical Standards Board of ICAI has considered some of the ethical issues which have been published in C.A. Journal of December, 2011 at pages 842-844 and are as under.

(i) Issue : 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?

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 articled assistants. He may hold Certificate of Practice, but he is not entitled to perform attest functions.

(ii) Issue: Can a member in practice be promoter/ Promotor director of a company?

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

(iii) Issue: Can a member in practice be a sleeping partner in family business concern?

A member in practice can be a sleeping partner in a family business concern, provided he takes specific permission from the Council in terms of Regulation 190A of the CA Regulations.

(iv) Issue: Can a member share profits with the widow of his deceased partner?

When there are two or more partners and one of them dies, the widow of the deceased partner cannot receive a share of the profit of the firm. However, such widow of a deceased partner, would be entitled to share the profits only where the partnership agreement contains a provision that on the death of the partner, his widow or legal representative would be entitled to such payment by way of sharing of fees or otherwise for the specified period.

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

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

2. Conversion of a CA firm into Limited Liability Partnership (LLP)

ICAI has issued detailed guidelines for conversion of CA firms into LLPs on 4-11-2011. These guidelines are published on pages 939-941 of CA Journal for December, 2011. Some of the salient features of these guidelines are as under.

(i) All existing CA firms who want to convert themselves into LLPs are required to follow the provisions of Chapter-X of the Limited Liability Partnership Act, 2008 read with Second Schedule to the said Act containing provisions of conversion from existing firms into LLP.

(ii) In terms of Rule 18(2)(xvi) of the LLP Rules, 2009, if the proposed name of LLP includes the words ‘Chartered Accountant’ or ‘Chartered Accountants’, as part of the proposed name, the same shall be referred to ICAI by the Registrar of LLP and it shall be allowed by the Registrar only if the Secretary, ICAI approves it.

(iii) If the proposed name of LLP of CA firm resembles with any other non-CA entity as per the naming Guidelines under the LLP Act and its Rules, the proposed name of LLP of CA firm may include the word ‘Chartered Accountant’ or ‘Chartered Accountants’, in the name of the LLP itself and the Registrar, LLP may allow the same name, subject to compliance to Rule 18(2)(xvi) of the LLP Rules as referred above.

(iv) For the purpose of registration of LLP with ICAI under Regulation 190 of the Chartered Accountants Regulations, 1988, the partners of the firm shall apply in ICAI Form No. 117 and the ICAI Form No. 18 along with copy of name registration received from the Registrar of LLP and submit the same with the concerned regional office of the ICAI. These Forms shall contain all details of the offices and other particulars as called for together with the signatures of all partners or authorised partner of the proposed LLP.

(v) The names of the CA firms registered with the ICAI shall remain reserved for the partners as one of the options for LLP names, subject to the provisions of the LLP Act, Rules and Regulations framed thereunder.

(vi) There are provisions relating to seniority of firms.

(vii) These guidelines will apply to conversion of proprietary firm into LLP.

(viii) There are similar provisions for formation of new LLP by Chartered Accountants in practice.

(ix) It may be noted that the following issues have not been clarified in these guidelines.

(a) Whether a CA firm converted into LLP can continue as statutory auditors of a limited company under the Companies Act and other similar Acts.

(b) Whether the proprietary concern or firm of Chartered Accountants converted into LLP will get exemption from Capital Gains Tax on transfer of capital assets, including goodwill, of the firm to the LLP. No specific exemption is provided in section 47 of the Income-tax Act on such conversion.

3. EAC Opinion

Depreciation on freehold land having mineral reserves and the internal roads constructed in the premises of the company.

Facts
A State Government company is engaged in mining and marketing of four major minerals, namely, rock phosphate, gypsum, lignite and limestone. The company was granted a mining lease for excavation of lignite for a period of 20 years and accordingly, the company has purchased/acquired a 1063.35 hectare of freehold land having estimated mineable lignite reserves to the tune of 172.90 lakh MT for sum of Rs.18,98,59,223. As per the approved mining plan, the reserves of lignite is to be mined in 20 years. The ownership of the land would, however, remain with the company after excavation of the entire lignite reserves. After complete excavation of the mining of lignite, land would not be useful for any other purposes.

According to the company, as the mining lease was for a period of 20 years, the company has adopted the accounting policy to write off the freehold land on the basis of future benefit likely to be accrued and started writing off the value of land equally @ 1/20th per annum in view of the fact that the lease is only for 20 years. This policy has been reflected in the books of account by way of note reproduced below:

“Cost of freehold mining land is amortised on the basis of future benefit likely to be accrued.”

Due to some natural hazards beyond the control of the company, the company could not excavate the requisite of lignite as per approved mine plan.

The auditors while conducting the audit have commented that the method of writing off freehold land was not commensurate with the declared accounting policy and the matching principle. According to the auditors, as per matching principle, cost and revenue should match in the period in which they occur and such as, the company should have amortised the freehold land on the proportion of lignite mined during the year and total recoverable reserves available at the beginning of the year.

The company is also having internal roads in the mine area and the same are depreciated as per Schedule XIV to the Companies Act, 1956, i.e., @ 5% p.a. on the written down value (WDV). The auditor was of the view that internal roads in the mine area should have been depreciated on the line of amortisation of land.

The company sought the opinion of EAC as to whether accounting treatments given by the company for amortisation of the land is in order or not. If not, whether the company should charge depreciation as suggested by the auditors.

Opinion
The EAC is of the view that, in this case, since the sole purpose of acquisition of the land is to exploit it for extraction of mineral recourse and extraction of such minerals is the only economic use of the land for the company, the useful life of the freehold land would be more appropriately governed by the extractable minerals available on the land extraction thereof. In other words, it would be more appropriate to depreciate the freehold land on the basis of units of minerals extracted, viz., Units of Production method. Accordingly, the Committee is of the view that the cost of acquisition of freehold land, in the case of the company, should be depreciated on the basis of the actual quantity of lignite extracted during a period as against the estimated quantity of extractable mineral reserves.

Further, EAC is of the view that the change in the method of depreciation from straight-line method to Unit of Production would result into more appropriate presentation of financial statements of the company. The impact of the change in the method of depreciation should be calculated retrospectively from the date of the concerned asset coming into use.

The EAC is also of the view that in the case of the company, the internal roads may include two types of roads — roads that might exist when the freehold land is acquired and those developed thereafter by the company to gain access to mineral reserves. The application of unit of production method for depreciation of roads does not appear to be appropriate and the same should be depreciated separately based on their useful life.

(Pages 867 to 871 of CA Journal, December 2011).

4. ICAI News
(Note : Page Nos. given below are from CA Journal for December, 2011)

i) ICAI Publications

a) Handbook on Professional Opportunities in Internal Audit (Page 946)
b) Handbook on Special Economic Zone (Revised Edition)

ii) Guidance Note on certification of XBRL Financial statements has been published on page 968-978.

iii) CPE hours requirements for various categories of members of the Institute for the block period of 3 years (1-1-2011 to 31-12-2013)

ICAI and its members

1. Code of ethics

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.

On account of attritions/non-fulfilment of eligibility conditions, the number of options has been reduced to 9,000 in the year 2009. The company has followed intrinsic value method for ESOP accounting as provided by the ‘Guidance Note on Accounting for Employee Share-based Payments’ issued by ICAI.

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.

ICAI News

(Note : Page Nos. given below are from CA Journal for September, 2012)

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.

EAC Opinion

Accounting for book value of fixed assets demolished for expansion purpose.

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.

Code of Ethics

The Ethical Standards Board of ICAI has given answers to some of the ethical issues raised by our members. These are published on pages 416- 418 of C.A. Journal for September, 2012. Some of these issues are as under:

(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.

ICAI and its members

1. Code of ethics:

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)

(i) Filing financial statements in XBRL mode:
The MCA has issued General Circular No. 9/2011, dated 31-3-2011 and has stated that it has decided to mandate certain class of companies to file balance sheets and profit and loss account for the year 2010-11 onwards by using eXtensible Business Reporting Language (XBRL) taxonomy. The financial statements required to be filed in XBRL format would be based upon the taxonomy on XBRL developed for the existing Schedule VI, as per the existing (non-converged) Accounting Standards notified under the Companies (Accounting Standards) Rules, 2006.

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)

ICAI News

(i) In CA students Journal for June, 2012 (Page 19) the following announcement by ICAI is published.

“All members of ICAI are hereby informed that the Council of ICAI has prescribed Regulation 47 of the CA Regulations which reads as ‘No amount shall be charged from, or payable by, an article assistant or any other person on his behalf, directly or indirectly, whether by way of premium or as loan or deposit or in any other form in connection with his engagement as an article assistant’.”

“In view of the above, charging of premium form article assistants is misconduct under the provision of clause (1) of Part II of the Second Schedule to the C.A. Act and punishable u/s. 21B(3) of the C.A. Act.”

(ii) In CA students Journal for June, 2012 (page 19) the following announcement is published. “It has been decided to henceforth (w.e.f. 23-5-2012) charge a sum of Rs.500 per person as the education verification fee from the companies/agencies seeking such verification of qualification. The fee shall be payable by D.D. in favour of the Secretary, ICAI, payable at New Delhi.”

It is clarified that this fee is not payable by the Central/State Government, PSUs, Concerned Member/Student.

Code of ethics

The Ethical Standards Board of ICAI has given answers to some of the ethical issues raised by our members. These are published on page 1794 of C.A. Journal for June, 2012. Some of these issues are as under.

(i) 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 Government 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.

(ii) Issue: Can a goodwill of a Chartered Accountants’ firm be purchased? The Council of the Institute considered the issue whether the goodwill of a proprietary firm of 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, subject to the provisions appearing at pages 129-130 of the Code of Ethics 2009 edition.

(iii) Can a practising Chartered Accountant solicit clients or professional work by advertisement? Clause (6) of Part-1 of the First Schedule to the Act prohibits a practising 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.

(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 partnership 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.

ICAI News

(i) Code of Ethics

The Ethical Standards Board of ICAI has released a brochure — ‘CA Ethics Plus’ to promote ethical standards amongst members. This will available on the website of ICAI. (Page 9) (ii) Message from Minister of Corporate Affairs In a recent message given by the Minister of Corporate Affairs, he has stated as under: “The Institute of Chartered Accountants of India, being an excellent regulator, standard setter and educator, has been greatly contributing as a ‘Partner in Nation-building’.

The accountancy profession has been the backbone of fiscal discipline in the country. The nation has great expectations from the Institute and its members. They have a pivotal role to play in good governance by ensuring transparency, compliance with statutory as well ethical requirements, correctness of accounts and business advice for the benefit of all the stakeholders, including the government and society. You have a crucial role to play in India’s growth story. Keep up the good work.”

(iii) CA qualification recognised by University System

The following news item is reported on page 110 of C.A. Journal for July, 2012. The Chartered Accountancy qualification has been recognised in the University System particularly for pursuing Doctorate of Philosophy (Ph.D). The Association of Indian Universities (AIU) has recognised CA Course as equivalent to post-graduate course in Commerce for registration to Ph.D Programme by passing the following resolution — “Resolved that the graduates having passed their final examination of the Institute of Chartered Accountants of India, New Delhi be treated to have completed a post-graduate degree in Commerce or allied discipline for purpose of registration to Ph.D.” With constant follow-up with various Universities and Indian Institute(s) of Management, the Board of Studies has been successful in obtaining recognition from 84 Universities and 6 IIMs for members of the Institute to pursue Ph.D. Recently, ICAI has received letter from University Grants Commission (UGC) stating that the threshold limit of 55% marks in post-graduate examination is not applicable in case of the Chartered Accountants for enrolment to Ph.D Programme.

(iv) Status of intervening holidays during CA Examination

The Council of the Institute recently considered the issue regarding status of intervening holidays during CA Examinations and decided that the break in between examination days, though not holidays, be treated as period actually served under articles. The Council further decided that if an articled assistant appears for one group, all intervening break for any reason, from the day of commencement of CA Examination till the day of last examination of the concerned group and similarly, if an articled assistant appears for both groups, then all 637 (2012) 44-A BCAJ intervening breaks for any reason from the day of commencement of CA Examination and completion of both groups of the examination be treated as part of the training and the articled assistants be deemed to be on duty accordingly. Accordingly, all intervening holidays or breaks due to any reason, falling in between the day of commencement of CA Examination till its completion as above explained will be treated as part of the training i.e., the articled assistants be deemed to be on duty. (Page 212)

(v) Campus Placement Programme

The following Campus Placement programme for newly qualified CAs has been organised by ICAI during the months of August and September, 2012. (Refer page 213)

(vi) Update on strength of members and students of ICAI

The following are some of the figures made available for information of members (page 192). Membership strength of the ICAI stands at 1,96,748 as on 15th June, 2012.

Update for strength of students available on page 194.

ICAI News

(i) New publications of ICAI (a) Indian Accounting Standards (Ind AS) Vol. I and II

(b) Technical Guide on Audit in Automobile Industry (Page 340)

(d) A Study on, Drafting, Conveyancing, etc. of Commercial and other Documents

(ii) CA firms and SMP (a) ICAI has arranged a MCA 21 Compliance Software viz. ‘ICAI-ROC’ for members in practice and CA Firms (Page 341)

(b) ICAI has launched its exclusive website www.icai.org.in for members in practice and CA Firms (Page 341)

(iii) ICAI — Tax Suite ICAI has arranged a Tax Compliance Software viz. ICAI-Tax Suite for members in practice and CA Firms (Page 342)

Code of ethics

The Ethical Standards Board of ICAI has considered some ethical issues which are published in CA Journal for August, 2011, at page 214. Some of these issues are as under:

(i) Issue: Whether Companies in which Chartered Accountants have been appointed as Directors on their Board can publish their attainments:

In some cases, description about the Chartered Accountant’s expertise, specialisation and knowledge in any particular field as well as appellations or adjectives to their names are published in the prospectus or public announcements issued by the Company. The Council of ICAI has clarified that the inclusion of the name of the member of ICAI in such prospectus, public announcements or other public communication does not contravene Clauses (6) and (7) of Part I of the First Schedule of C.A. Act. However, the member should ensure that in such publications the Company does not advertise the professional attainments of the member. It is also necessary to ensure that by such publications member should not directly or indirectly solicit for professional work.

It is advisable for the member that as soon as he is appointed as a Director, he should specifically inform the Company about the above restrictions. He should request the Company that before any such communication is issued, the Company it should get the contents of the communication about the member approved by him.

(ii) Issue: Whether a Chartered Accountant/Firm is permitted to use logo on letter heads, stationery, etc.

The use of logo/monogram of any kind/form/style/ design/colour, etc. on any stationery, documents, visiting cards, magnetic devices, internet, letter heads, sign board, etc. is prohibited. Use/printing of member/QR:firm name in any other manner tantamounting to logo/monogram is also prohibited. However, a common CA logo has been allowed to the members, provided it is used in the correct manner within the terms of Council Guidelines.

ICAI and its Members

1. Code of ethics

The Ethical Standards Board of ICAI has considered some ethical issues which have been published in C.A. Journal for October, 2011, at pages 528-530. Some of these issues are as under:

(i) Issue : Whether a statutory auditor can be appointed in the adjourned meeting in place of existing statutory auditor where no special notice for removal or replacement of the retiring auditor is received at the time of the original meeting ?

If any annual general meeting is adjourned without appointing an auditor, no special notice for removal or replacement of the retiring auditor received after the adjournment can be taken note of and acted upon by the company, since in terms of section 190(1) of the Companies Act. Special notice should be given to the Company at least fourteen clear days before the meeting in which the subject-matter of the notice is to be considered. The meeting contemplated in section 190(1), undoubtedly, is the original meeting.

(ii) Issue : Whether a Chartered Accountant or a firm of Chartered Accountants can charge or offer to charge professional fees based on a percentage of turnover ?

In terms of Clause (10) of Part I of First Schedule to the CA Act, a Chartered Accountant or a firm of Chartered Accountants is not permitted to charge fees on a percentage of turnover, except in the circumstances provided under Regulation 192 of CA Regulations. This Regulation permits fees to be charged based on a percentage of profits or based upon the findings, or results of such work in the following cases :

(a) In the case of a receiver or a liquidator, the fees may be based on a percentage of the realisation or disbursement of the assets;

(b) In the case of an auditor of a co-operative society, the fees may be based on a percentage of the paid-up capital or the working capital or the gross or net income or profits; and

(c) In the case of a valuer for the purposes of direct taxes and duties, the fees may be based on a percentage of the value of the property valued.

(iii) Issue : Can a practising Chartered Accountant accept a position as auditor previously held by some other Chartered Accountant in such conditions as to constitute undercutting ?

Prior to the amendment in the CA Act in 2006, undercutting was not permitted under Clause (12) of Part-I of the First Schedule to the CA Act. After the 2006 amendment, this provision has been repealed, and hence, it is not violative for a practising Chartered Accountant to accept a position as auditor at a fee below the fee earlier charged by the previous auditor.

(iv) Issue : Whether a member of the Institute shall be deemed to be guilty of professional misconduct if he does not supply the information called for, or does not comply with the requirements asked for, by the Institute ?

A member of the Institute shall be deemed to be guilty of professional misconduct if he does not supply the information called for, or does not comply with the requirements asked for, by the Institute [As per Clause (2) of Part III of the First Schedule to the CA Act].

2. Disciplinary case

In the case of CA P. Ramkrishna, ICAI decided to remove the name of the member for a period of 5 years for professional misconduct in the matter of audit of Global Trust Bank Ltd. This disciplinary case was started by ICAI on the basis of information received by it prior to amendment of the C.A. Act in 2006. When the matter was referred to the Delhi High Court for confirmation of the penalty, the member argued that ICAI had no jurisdiction to decide an information case started before amendment of the C.A. Act after the amendment made in that Act. The Single Judge of the High Court decided the matter in favour of the member on this technical ground. On appeal by ICAI before the Division Bench of the High Court, the appeal was decided in favour of ICAI. The High Court held that the changes in the procedure for conducting disciplinary cases by amendment of C.A. in 2006, were only meant to fine-tune certain technical issues and this amendment did not take away the jurisdiction of ICAI to award punishment in a case where disciplinary proceedings were started before the amendment in an Information case. Thus, the recommendation of ICAI to remove the name of the member for a period of 5 years was approved by the High Court.

3. EAC opinion

Segment reporting

Facts
A public limited company is engaged in the business of manufacturing products on contract basis. The company manufactures engineering products, castings, etc. as per the design, engineering standards and specifications prescribed by the customers. The company manufactures industrial valves under brand name of its customer in the USA. The company also manufactures castings, both machined and unmachined, and supplies the same to tractor and auto sector.

The geographical distribution of the sales of the company is restricted to one country/region. For example, more than 95% of valves are supplied to the USA. Castings are sold in India with a small portion of export.

The financial statements presented and reviewed by the Board is for the company as a whole without any segmentation. Bank facilities are also arranged based on the financials of the company as a single-segment organisation. Banks have accepted this position.

Query
On the facts and circumstances stated above, the company has sought the opinion of the Expert Advisory Committee as to whether it is in order to continue the present practice of treating the business as a single segment, i.e., contract manufacturing.

Opinion

After considering the provisions of Accounting Standard (AS)17, ‘Segment Reporting’, the committee is of the view that to identify business and geographical segments, the enterprise needs to evaluate whether the risks and returns of the different components are different as per the factors stated in the definitions of the terms ‘business segment’ and ‘geographical segment’. The organisational structure of an enterprise and its internal reporting system are normally the basis for identifying the segments.

From the facts of the case, the committee is of the view that the information about whether the risks and returns associated with the various products in which the company deals in, are different, is not clear.

In the company’s case, some of the products manufactured by the company, for example, in the case of valves, sales are restricted to a single customer and accordingly, the risks and returns in such cases where the company is relying on a single customer may be different from the risks and returns of a product where the company is not relying on a single customer. Similarly, risks and returns in case of products manufactured by machines may be different from the products which are hand-made. Therefore, considering the nature of the products produced, production processes involved in manufacturing and type or class of customers, the company should evaluate whether there can be different business segments in the present case.

Further, the Committee is also of the view that there may be different pricing strategies, credit risks and exchange control regulations involved for domestic and international sales. In such a case, the risks and returns in different geographical regions may be different and accordingly, the different geographical regions may be considered as different geographical segments. Thus, geographical segments may also be identified by segregating its total turnover into domestic sales and international sales, irrespective of the nature or kind of the products being sold.

In view of the above, if it is concluded that there is neither more than one business segment, nor more than one geographical segment, segment information is not required to be disclosed. The fact that there is only one ‘business segment’ and ‘geographical segment’ should be disclosed by way of a note as per the requirements of Explanation to paragraph 38 of AS-17.

[Please see pages 561 to 564 of C.A. Journal, October 2011].

4. Result of campus placements of members
Campus placement programme for new members was organised in major cities in August-September, 2011. Brief summary of the placement programme is given below:

(i)

No. of candidates registered

—

10317

(ii)

No. of interview
teams

—

177

(iiii)

No. of participating
organisations

—

(iv)

No. of jobs offered
(12.23%)

—

1262

(v)

Highest salary
offered fordomestic

posting (Rs. lakh
p.a.)

—

13.93

(vi)

Minimum salary
offered

—

3.75

(Rs. lakh p.a.)

(vii)

Average salary (Rs.
lakh p.a.)

—

6.25

Out of 1262 jobs offered, 1098 candidates have accepted the job offers.

(For details please refer pages 623-624 of C.A. Journal for October, 2011)

5. ICAI News

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

(i) Peer Review Board
The Peer Review Board has issued a Notification in August, 2011, stating that the cost of the peer review for stages I, II and III, including honorarium and TA/DA for reviewer and his qualified assistant, shall be as under:

Total revenue from attestation service

Cost

clients of practice unit (Per Annum)

(Rs.)

Less
than Rs.10 lakh p.a.

15,000

From
Rs.10 lakh to 50 lakh p.a.

25,000

From
Rs.50 lakh to 1 crore p.a.

40,000

From
Rs.1 crore to 3 crore p.a.

60,000

From
Rs.3 crore to 5 crore p.a.

75,000

Above Rs.5 crore p.a.

1,00,000

(Refer page 632)

(ii) Statutory audit of banks
At present, an audit firm can take up statutory central audit of one PSB, four private sector banks and four foreign banks simultaneously each year. ICAI has reviewed these guidelines and it has been decided that an audit firm which takes up statutory central bank audit assignment in private and foreign banks will not qualify to take up statutory audit in public sector banks during that particular year. The revised guidelines will come into effect from 2012-13. (page 632)

(iii) ICAI-ROC
ICAI has arranged a MCA-21 compliance software viz. ICAI-ROC for members in practice and CA firms. ICAI-ROC software was launched on 1-7-2011. Salient features of this software are given in page 633.

(iv) ICAI — Tax Suite
A Tax compliance software for members in practice and CA firms has been developed by ICAI in the name of Tax Suite. Members in practice and CA firms can make use of this software which was launched on 1-7-2011. Salient features of this software are at page 634.

(v) Group term insurance for members
ICAI has tied-up with LIC for special scheme for insuring life of its members and their spouses. This scheme is open for all the members of the Institute. The details about the premium and other conditions are at page 635.

(vi) Developing website for CA firms
ICAI had launched an exclusive website www.icai.org.in to enable the members in practice and CA firms to create their own websites and upload details of their firms in order to get network and get better visibility. So far, 1699 firms have created their websites. (page 519)

(vii) List of members
List of members as on 1-4-2011 has been prepared and hosted on the website of the Institute. The members can review the list on the website. CDs of the members’ list will also be released by ICAI. (page 519)

(viii) Number of Tax Audit Assignments
ICAI has clarified that Audit conducted u/s.44AD, 44AE and 44AF of the Income-tax Act will not be included in the specified number of Tax Audit Assignments conducted by the members of the Institute. (page 519)

ICAI and its members

1. Code of Ethics:

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.

ICAI News

(i) Empanelment to carry out circulation Audits of Publications

Audit Bureau of circulations which certifies figures of Member Publications desires to empanel firms of Chartered Accountants in the States of
(a) Assam & North Eastern States,
(b) Bihar,
(c) Chhatisgarh,
(d) Goa,
(e) Haryana,
(f) Himachal Pradesh,
(g) Madhya Pradesh,
(h) Punjab,
(i) Orissa,
(j) Uttaranchal and
(k) UP.

The criteria for empanelment and other details are given on page 691.

(ii) Tax Audit Reports

It is reported that according to the CBDT, in respect of financial year 2010-11, total number of Tax Audit Returns filed is about 16 lac. These tax audits were conducted by about 59000 audit firms. The data is further being processed with regard to fake membership numbers, members who have exceeded specified number (ceiling) of tax audit assignments, etc. In order to prevent misuse of membership numbers of tax auditors, it is proposed that, from next year, the uploading of tax audit reports along with digital signatures of auditors may be made mandatory. If members have any suggestions in this regard, the same may be forwarded to ICAI.

(iii) ICAI publications

(a) Compendium of Auditing Standards and Auditing Guidance Notes Vol. 1 and 2. (As on 1-10-2011)

(b) Guide to Audit of Complex Financial Instruments.

(d) Study on Manner of IFRS Implementation in EU and General Status of IFRS Implementation in Selected Countries. (Refer pages 787-788)

EAC Opinion

Accounting for leave salary laibility

Facts

(i) In the case of a public sector company the rules relating to the leave by employees are as under:

(a) The entitlement of Earned Leave (EL) is related to the number of years of service put in by the employee. The earned leave has two components viz. Encashable Leave (EEL) and Non-Encashable Leave (NEL).

(b) The company gives advance credit of leave in terms of EEL and NEL on the standard dates i.e., 25th June and 25th December.

(d) EL can be encashed at any time during the period of 300 days. NEL can be encashed at the time of retirement.

(e) There are similar Rules for Half-Pay Leave (HPL).

(ii) The accounting practice followed by the company in respect of Leave Liability is as under: Liability for encashable earned leave (EEL), nonencashable earned leave (NEL) and half-pay leave (HPL) is provided for in the books on accrual basis for the value of leave outstanding at the end of the year. According to the company, provision for half-pay leave is made for the total leave balance at the year end without restricting it to 480 half days (240 full days) per employee in line with the requirements of AS-15.

(iii) The Auditors were of the view that this was a long-term liability for the reasons that the past pattern indicates that the employees are unlikely to avail/encash the entire carried forward leave during the next twelve months and hence, the benefit would not be short-term. Accordingly, keeping in view of behavioural pattern of the employees, the leave benefit should be considered as long-term benefit and the provision should be made based on actuarial valuation.

Query

Based on the above, the company had sought the opinion of the Expert Advisory Committee of ICAI (EAC)

(a) whether the company’s view that ‘Leave Liability’ is a short-term liability is correct and

(b) if not, how the change in accounting treatment should be accounted in the books.

Opinion

After considering the various provisions of AS-15, the EAC has expressed the following opinion:

a) Short-term employee benefits are those benefits which fall due wholly within 12 months after the end of the period in which the employees render the related service. Therefore, the treatment of ‘Leave Liability’ as ‘short-term employee benefit’ as interpreted by the company is not correct.

(b) The change in the accounting treatment of Leave Liability from ‘short-term employee benefits’ to ‘other long-term employee benefits’ should be treated as ‘prior period item’. Accordingly, the nature and amount thereof should be included and disclosed in the profit and loss account for the period in which the error is revealed as provided in AS-5. (Refer pages 710-714 of C.A. Journal for November, 2011)

Code of ethics

The Ethical Standards Board of ICAI has considered some of the ethical issues which have been published in C.A. Journal of November, 2011, at pages 771-772. Some of these issues are as under:

(i) Issue: Whether an auditor is required to provide the client or other auditor of the same enterprise access to his audit working papers ? Working papers are the property of an auditor. An auditor is not required to provide the client access to his audit working papers. The main auditors of an enterprise do not have right of access to the audit working papers of the branch auditors, except in case it is required by the regulatory norms.

(ii) Issue: Whether a joint auditor will be responsible for the work done by other joint auditor? Council direction under Clause (2) of Part I of the Second Schedule to the C.A. Act prescribes that in respect of audit work divided among the joint auditors, each joint auditor is responsible only for the work allocated to him, whether or not he has prepared a separate report on the work performed by him. However, on the other hand, all the joint auditors are jointly and severally responsible for the work which is not inter se divided among the auditors, and also for compliance of requirements of relevant statues.

(iii) Issue: Can a member in practice express his opinion on financial statements of any business or enterprises in which he, his firm or a partner in his firm has a substantial interest? As per Clause (4) of Part I of the Second Schedule to the C.A. Act, a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he expresses his opinion on financial statements of any business or any enterprise in which he, his firm or a partner in his firm has substantial interest. The word ‘substantial interest’ is defined in the Resolution passed by the Council in pursuance to Regulation 190A of the CA Regulations (Please refer Appendix F to Code of Ethics — P. 345).

(iv) Issue: Whether a statutory auditor can accept the system audit of the same entity? The statutory auditor can accept the assignment of a system audit of the same entity, provided it did not involve any scrutiny/review of financial data and information.

(v) Issue: Can a Chartered Accountant receive his professional fees in advance party or in full? There is no bar in the C.A. Act or in the CA Regulations as well as the Code of Ethics in taking the fees in advance.

ICAI and its members

1. Code of ethics:

The Ethical Standards Board of ICAI has considered some ethical issues which are published in the C.A. Journal of April, 2011, at page 1472. Some of these issues are as under:

(i) Issue: Whether a member in practice is permitted to undertake the management of NRI funds?

Response: A member in practice is not permitted to undertake such services, as it is not covered under ‘Management Consultancy and other Services’ specified by the Council.

(ii) Issue: Can a chartered accountant in practice provide ‘Portfolio Management Services’?

Response: As the ‘Management Consultancy and other Services’ expressly bars the activities of broking, underwriting and portfolio management, this is not permitted.

(iii) Issue: Can a chartered accountant in practice work as a ‘collection agent’?

Response: A chartered accountant in practice cannot work as a ‘collection agent’, as the ‘Management Consultancy and other Services’ specified by the Council, do not permit such engagement.

(iv) Issue: Whether the auditor of a Subsidiary Company can be a Director of its Holding Company?

Response: The auditor of a Subsidiary Company cannot be a Director of its Holding Company, as it will affect the independence of the auditor.

(v) Issue: Whether a member can take up AMFI (Association of Mutual Funds in India) Course and become a Member of the Association?

Response: Members from industry as well as from practice can pursue the AMFI Course. However, as to the question whether a member can be registered with it so as to take the role of Financial Intermediary, it has been decided that members in Industry, not in practice, can obtain the membership by registering them with a mutual fund/ Association, whereas members in practice (whether holding full-time COP or part-time COP) cannot do so.

(vi) Issue: Whether the permission of Council is necessary for a chartered accountant in practice to engage in share trading?

Response: Engagement by a member, in practice, in the business of buying and selling shares amounts to be ‘any business’ within the meaning of Clause (11) of Part-I of the First Schedule to the CA Act and hence prior permission of the Council is required.

(vii) Issue: Whether concurrent auditor of a bank can also undertake quarterly review of the same bank?

Response: Concurrent audit and the assignment of quarterly review of the same entity cannot be taken simultaneously, as the concurrent audit being a internal audit and the quarterly review being a kind of statutory audit undertaken simultaneously are prohibited under the provisions of ‘Guidance Note on Independence of Auditors’.

(viii) Issue: Whether a firm of Chartered Accountants can print special words ‘celebrating 75 years in the profession’ on the letterheads and envelopes?

Response: Publishing a book by a firm containing its history for the purpose of distributing to clients, associates, friends and well-wishers and printing of the words ‘Celebrating 75 years in the profession’ on special letterheads and envelopes will lead to solicitation of professional work, hence not permissible as per the provisions of Clauses (6) and (7) of Part of the First Schedule to the Chartered Accountants Act, 1949.

2. Revised Schedule VI of the Companies Act, 1956:

The Ministry of Corporate Affairs has notified a Revised Schedule VI of the Companies Act, 1956. This Revised Schedule VI is applicable for the Balance Sheet and Profit & Loss Statement to be prepared for the financial year commencing on or after 1-4- 2011. The horizontal form of old Schedule VI is now withdrawn. Now, all companies will have to prepare the Balance Sheet and Profit & Loss Statement in the vertical form. Some of the general instructions are as under.

(i) The disclosure requirements specified in Part I and Part II of this Schedule are in addition to and not in substitution of the disclosure requirements specified in the accounting standards prescribed under the Companies Act, 1956. Additional disclosures specified in the accounting standards shall be made in the notes to accounts or by way of additional statement, unless required to be disclosed on the face of the financial statements. Similarly, all other disclosures as required by the Companies Act shall be made in the notes to accounts in addition to the requirements set out in this Schedule.

(ii) Notes to accounts shall contain information in addition to that presented in the financial statements and shall provide where required (a) narrative descriptions or disaggregations of items recognised in those statements and (b) Information about items that do not qualify for recognition in those statements.

(iii) For the purpose of this Schedule, the terms used herein shall be as per the applicable accounting standards.

The above instructions will show the importance of accounting standards in the preparation and presentation of financial statements after the new Schedule VI comes into operation.

3. Opinion of EAC

Disclosures in segment report under consolidated financial statements:

Facts:
A company is engaged, through its subsidiaries, joint ventures and associates, in generation of power, development of expressways, airport infrastructure facilities in special economic zones, etc. It is a public company and is listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

The company has about 100 subsidiaries/associates/ JVs. It prepares its stand-alone financial statements and also consolidated financial statements. The consolidated financial statements (CFS) include the accounts of the company (stand-alone) and its subsidiaries, associates and joint ventures. According to the company, the CFS are prepared in accordance with historical cost convention and comply in all material respects with the applicable accounting principles in India, the notified accounting standards and other relevant provisions of the Companies Act.

The company believes that under CFS, segment report of the company and its subsidiaries, associates and joint ventures is prepared considering business segment as the primary segment and geographic segment as the secondary segment. The company has identified the business segments as power, roads, airport, engineering, procurement & construction (EPC) and others. Others include the operations like real estate development, investment company which do not qualify for separate disclosure as segments as per the threshold limit prescribed under Accounting Standard (AS) 17, ‘Segment Reporting’.

According to the company, each of the SPVs prepares its stand-alone annual accounts and has specifically identifiable timing differences for the computation of deferred taxes and specific allowances and disallowances for the computation of current tax. Also, each of the SPVs is individually discharging its tax liability and the books of account of each of these entities also carries the tax assets/provisions (net) distinctly. Hence, for the preparation of consolidated financial statements, the company is of the view that the tax assets/ expenses are part of the respective segments only, as the same are distinctly identifiable and directly attributable to those respective sectors/ segments. The company has prepared the consolidated segment report accordingly by classifying the tax assets/expenses under each of the respective segments. However, the same is not acceptable to the auditors who are of the view that the same should be disclosed as an unallocated items in segment report included in consolidated accounts. The auditors are also of the opinion that interest expenses relating to loans borrowed by the SPVs for their projects, overdrafts and other operating liabilities including loans identi

ICAI and its members

1. Code of ethics:

Ethical Standards Board of ICAI has considered some ethical issues which are published in the C.A. Journal of March, 2011 at P. 1344. Some of the these issues are as under.

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

Response: In respect of the Government Audit, the Institute has come 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 Government 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 the 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 a assignment wherein a percentage of professional fees is deducted by the Government to meet the administrative and other expenditure.

(ii) Issue: Can a Chartered Accountant in practice use/fix a monogram of the Institute on any column/wall located inside the office or on professional documents ?

Response : In view of the directions under Clause (7) of Part I or the First Schedule to the CA Act, a Chartered Accountant in practice is not permitted to use/fix a monogram of the Institute on any column/wall located inside the office or on any professional document.

(iii) Issue: Whether a member in practice is allowed to become a whole-time director of a company?

Response: A member in practice may become a Managing Director or a whole-time Director of a body corporate within the meaning of the Companies Act, 1956, subject to guidelines of corporate practice. However, w.e.f. 1-4-2005, he is not entitled to do attest functions.

(iv) Issue: Can a Chartered Accountant working in a CA firm hold CoP?

Response: A Chartered Accountant working in a C.A. firm can hold CoP. He is not entitled to do any attest function.

2. Accounting for rescheduling of lease rentals:

Facts:
A non-listed company (Company) is a subsidiary of a listed public company. It is an NBFC registered with the RBI. The company has a network of branches over a large part of India to carry on its business. Hence, it takes on lease various properties for its branches. The company is not in the business of leasing and renting.

The company has entered into a lease agreement which has the following main features:

(i) The lease agreement is for a period of nine years.

(ii) The rent for the first three years is at market rate on the date of lease agreement and has an escalation clause applicable after every three years.

(iii) The lessee has the option to exit from the agreement by giving three months’ notice.

The company has stated that in current scenario, the real estate rates in India as well as abroad have undergone various changes due to global financial meltdown and the fall in the equity markets. The property rates have gone down substantially in the range of 30% to 40% and are expected to go down further. Consequently, the rent agreed initially has turned to be substantially high with respect to the current circumstances. The company has been successful in renegotiating the lease rentals of its premises downwards. The company has accounted for lease rentals since the inception of the lease on straightline basis with respect of original lease terms. The company has also stated that in its case, the lease term would be the entire nine-year period as the entity has already decided the same at inception.

Further, the company has also stated that in current scenario, since it has been able to successfully renegotiate the rent, it can be reasonably assumed that the rent actually paid by it reflects the benefit that accrues to the entity and accordingly, the rents actually paid should be debited as expense to the profit and loss account. Further, the company feels that the current scenario is such that the terms in the lease deed have a very high probability of being renegotiated in future. Thus, in view of the company the aforesaid agreed rentals in the agreement are likely to be renegotiated as a further fall is expected.

Query: On these facts, the company has sought the opinion of the Expert Advisory Committee (EAC), whether the principle of recognising lease rentals over the lease term on straight-line method is correct ? and whether the monthly rental should be accounted for at the value of actual lease rent paid in such a case.

EAC opinion: The basic issue raised in the query relates to accounting for lease rentals in the case of operating lease. After considering paragraph 23 of AS-19 the EAC is of the view that as per the principles of AS-19 any departure from the straight-line basis of recognisation of lease expenses under an operating lease must reflect the time pattern of the user’s benefit and therefore it should be considered from any angle of use of the leased asset in physical terms, rather than the benefit derived from the angle of market rate of lease property. Since the leased property in the instant case would be used by the lessee throughout the lease term on a consistent basis, even though the lease rentals have been reduced due to economic slow-down, the Committee is of the view that the lease rent should be recognised on a straight-line basis.

Hence, the revised lease rentals should be taken into account for determining the charge to the profit and loss account over the lease period of nine years. Accordingly, the lease rentals paid under the original lease deed and revised lease rentals payable over the remaining period of the lease as per the supplementary lease deed, should be considered for determining the amount of annual charge on account of lease rentals on straight-line basis. Any resultant adjustments on account of lease rent already recognised in past should be recognised in the current year’s profit and loss account. (Page Nos. 1364 of C.A. Journal of March, 2011)

3. New Accounting Standards: The Govt. has notified new Accounting Standards after convergence with IFRS on 25-2-2011. There are 35 Standards which are called ‘IndAS’. These will be implemented in a phased manner over the next 3 or 4 years. The date for implementation of the Phase No. 1 is not yet notified.

4. New Committees of the Council: The Council of the ICAI has formed seven standing committees and thirty-three non-standing committees on 12th February, 2011 for one year. It may be noted that these include five new committees viz. Public Interest Advisory, Members in Entrepreneurship and Public Services, IFRS Implementation, Co-operatives and NGOS and Disciplinary — Satyam Bench. Names of the Chairman and the Vice-Chairman of these committees are as under :

(i) Standing & Other Committees: Chairman and Vice-Chairman of the Executive, Examination, Finance and Disciplinary Committee (U/s.21D), are Shri G. Ramaswamy (President) and Shri Jaydeep N. Shah (Vice-President), respectively, and Chairman of Board of Discipline (u/s.21A), Disciplinary Committee (u/s.21B), and Disciplinary Committee — Satyam Bench (u/s.21B) is Shri G. Ramaswamy (President).

(ii) Non-standing Committees — Chairman

Sr. No.

Name of the Committee

Chairman

(a)

Accounting Standard Board

Manoj Fardnis

(b)

Auditing & Assurance

Abhijit

Standard Board

Bandyopadhyay

(c)

Board of Studies

V. Murali

(d)

Continuing Professional

Sumantra Guha

Education

Sr. No.

Name of the Committee

Chairman

(e)

Corporate Laws and

S. Santhanakrishan

Corporate Governance

(f)

Direct Taxes

Sanjay K. Agarwal

(g)

Editorial Board

G. Ramaswamy

(h)

Ethical Standards Board

Subodh K. Agrawal

(i)

Expert Advisory

Jayant P. Gokhale

(j)

IFRS Implementation

Amarjit Chopra

(k)

Indirect Taxes

Bhavna G. Doshi

(l)

Internal Audit

Rajkumar S. Adukia

Standards Board

(m)

International Taxation

Mahesh P. Sarda

(n)

Members in Industries

K. Raghu

(o)

Peer Review Board

Pankaj I. Jain

(p)

Professional Development

Amarjit Chopra

(q)

Research

Nilesh S. Vikamsey

Non-standing Committees — Chairman

(Refer Page Nos. 1428 to 1433 of C.A. Journal of March, 2011)

5. ICAI News:

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

i) Amendment of Schedule VI to Companies Act:

The Government has modified the existing Schedule VI giving Form of Balance Sheet and Profit and Loss A/c. by a notification. The new format applies to all audited financial statements for the year 2010-11 and onwards. Therefore, the financial statements for 2010-11 and onwards will have to be prepared and published in the new form of Schedule VI.

ii) New buildings of ICAI:

Foundation stones for new ICAI Bhavans at Ahmedabad, Patna and Saharanpur Branches have been laid by our President. (Page 1316)

iii) Action Plan for 2011:

Our new President has announced his Action Plan during the term of his office in 2011-12. This includes actions to be taken about new initiatives for Branding ICAI, Members in Practice and Industry, Students and International Relations. (Pages 1320-1322)

iv) 61st Annual Function of ICAI:

61st Annual Function of ICAI was held at New Delhi on 11-2-2011. Details of the Function are at Pages 1334-1343.

v) Insurance against Professional Indemnity:

ICAI has arranged insurance protection for our members in practice and for C.A. Firms providing Professional Indemnity. ICAI has signed MOU with New India Assurance Co. Ltd. under which the insurance company will provide insurance scheme to our members at a heavily discounted premium. Under this scheme the insurance company will provide professional indemnity to our members and their firms. (Pages 1316 and 1436)

vi) Guidance Note on Audit of Property, Plant and Equipment:

The above guidance note has been issued by the Auditing and Assurance Standards Board of ICAI. This guidance note should be read with the ‘Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and Related Services’ issued by ICAI. Full text of the Guidance Note is published on Pages 1442-1448.

vii) Scholarship for C.A. Students:

Board of Studies of ICAI is granting monthly scholarship to deserving students on following basis.

Sr.

Scholarship name

No. of

Amount

Eligibility criteria

No.

scholarships

(p.m.) (Rs.)

Merit

1250

Granted to students whose names appear at
Sl. No. 1-10

of Merit lists of CPT/IPCC/PCC of Nov./Dec.
2010 Exam

Merit-cum-need

1250

Available to rank-holders of CPT/IPCC
Nov./Dec. 2010

Exam, provided their parent/guardians total
annual in

come does not exceed Rs.1,50,0000

Need Based and

1000

Available to students of PCC/IPCC/Final,
provided their

parent/Weaker Sections guardians’ total
annual income

does not exceed Rs.1,00,000

Campus Placement for Articled Assistants:
Board of Studies of ICAI has introduced campus placement scheme for selection of Articled Assistants by C.A. Firms. This is in addition to the Online Placement Service already available at http://bosapp. icai.org The campus placement will be held between 15th and 30th April, 2011 in cities viz. Ahmedabad, Mumbai, Nagpur, Pune, Bangalore, Chennai, Ernakulam, Hyderabad, Kolkata, Indore, Jaipur, Kanpur, Ghaziabad, Chandigarh and New Delhi.

(Refer C.A. Students Journal for March, 2011, Page 33)

ICAI and its members

Code of ethics

The Ethical Standards Board of ICAI has considered some ethical issues which are published in C.A. Journal for July, 2011, at pages 129-130. Some of these issues are as under:

(i) Issue: Can a Chartered Accountant advertise his professional attainments or services?

After amendment of the C.A. Act in 2006, it is not possible to issue any advertisement soliciting clients under para (6) of the Part I of Schedule I. However, other advertisements about professional attainments or services under para (7) of Part I of Schedule I are permitted. This is subject to the guidelines issued by the Council of ICAI. Detailed guidelines issued by ICAI are given on pages 129-130.

(ii) Issue: Whether a member can arrange business for Insurance companies?

In May, 2011 (page 1653) of C.A. Journal it was stated that this is not possible. It is now clarified that “A member is permitted to render Insurance Financial Advisory Services.” (page 130)

LLP of our members can be statutory Auditors

In the message from our President at P. 9 of C.A. Journal for July, 2011, it is stated that practising Chartered Accountants can now form Limited Liability Partnership (LLP). The Ministry of Corporate Affairs (MCA) has clarified in its Circular No. 30/2011, dated 26-5-2011 that an LLP of Chartered Accountants will not be treated as a Body Corporate u/s.2(7)(c) of the Companies Act. Therefore, such LLP of our practising members can now be appointed as statutory Auditors of a Limited company.

However, there is no clarification on the following issues:

(i) Whether such LLP of our members can be appointed as tax auditors under the Income- tax Act, State VAT Act, Public Trust Act or other similar legislation.

(ii) Whether such LLP can undertake tax representation work, management consultancy work or any other professional work which a Chartered Accountant is permitted under the C.A. Act.

(iii) Whether the name of such LLP as approved by the Registrar of Companies for registration of LLP will be accepted by ICAI and there will be no requirement for obtaining permission for name of C.A. firm under the C.A. Act and regulations.

(iv) Whether ICAI will give a separate Registration No. to such LLP and what will be the procedure for removal of the existing name of C.A. firm from the Register of Firms maintained by ICAI.

(v) Whether changes in constitution of such LLP which are required to be notified to ROC will also be required to be notified to ICAI.

(vi) If an existing C.A. firm is converted into LLP, there will be tax implications since the provisions similar to section 47(xiii) or section 47(xiii b) of the Income-tax Act have not been made when the I.T. Act was amended in 2010.

There will be some other procedural formalities to be followed by our members once this new concept of recognising LLP of our members for C.A. practice is introduced. Let us hope that ICAI will issue guidelines on these issues as early as possible.

Differences between IFRSs and IND AS

ICAI has issued a Note on pages 117 to 126 of C.A. Journal for July, 2011, explaining the changes made by the Ministry of Corporate Affairs (MCA) in Indian Accounting Standards (IND AS) on the recommendations by the National Advisory Committee on Accounting Standards (NACAS) and ICAI. The details of these changes are available on MCA website. It is clarified that IND AS will come into force when the MCA notifies them u/s.211(3)(c) of the Companies Act.

Certificate Courses offered by ICAI

Details about the following certificate courses offered by ICAI are given on pages 127 and 128 of C.A. Journal for July, 2011: Certificate courses on (i) Arbitration, (ii) Derivatives, (iii) Enterprise Risk Management, (iv) Forensic Accounting and Fraud Detection using IT and CAATs, (v) Forex and Treasury Management, (vi) Indirect Taxes, (vii) Internal Audit, (viii) International Taxation, (ix) Master in Business Finance and (x) Valuation.

EAC Opinion

Treatment of loss arising on sale of underperforming assets and associated liabilities to a group company of the supplier of the assets

Facts
A listed company had purchased 20 windmills. These windmills were installed at the site of the company. The supplier was paid in full at Rs.128 lakh per machine amounting to Rs.2560 lakh at debt: equity ratio of 75:25. The debts were funded by two nationalised banks. The machines installed were under operations and maintenance (O & M) for two years free of charge. The supplier had also executed a bond of performance guarantee of power generation of 5 lakh units per machine annually and individually with effect from the date of commissioning, and to compensate the shortfalls in the power generation at the prevailing State Electricity Board’s rate.

The company has stated that right from the inception, there were several problems in the power generation, land title, encroachment thereof and services. The company intimated the supplier regarding poor revenue generation and performance in respect of the 20 windmills. As per the company the supplier admitted and affirmed about the non-performance and low performance of the machines.

After prolong negotiation the company and supplier entered into a Memorandum of Understanding (MOU) dated 10th July, 2008. Now, one of the group companies of the supplier, after getting the sanction of the term loan for takeover of the assets and liabilities, will take over the assets and liabilities of the company in respect of the aforesaid machineries. On the transfer of assets by the company there will be no cash flows, but the accounts, viz. Windmill Generation Receivable Account, Supplier Account, Term Loan Account and Windmill Assets Account (WDV) will be squared off. This process of squaring off will result in the net loss of Rs.444 lakh (excess debit balance) to the company.

Query

On these facts the company had sought the opinion of the EAC as to whether the said loss of Rs.444 lakh arising out of the aforesaid windmill transaction can be amortised over a period of time or whether the said loss should be fully charged off in the year in which windmills are sold by the company.

Opinion

After considering paragraphs 78 and 96 of the Framework for the Preparation and Presentation of Financial Statements issued by the Institute of Chartered Accountants of India, the Committee has taken the view that an expenditure can be recognised as an asset only if it results into a resource controlled by the entity and some future economic benefits are expected to flow to the enterprise as a result of such expenditure. Since neither of the conditions is met in the case of the loss under consideration, it cannot be recognised as an asset and, therefore there is no question of amortisation thereof. Accordingly, such loss should be fully charged off to the profit and loss account when incurred.
(Refer pages 147 to 149 of C.A. Journal — July, 2011)

Achievements of some of the members of the accounting profession are listed on pages 167 of July, 2011 issue of C.A. Journal

(i) Shri K. S. Aiyar — considered as father of Indian Accountancy and the pioneer of commerce education in India. System of three years Articleship for students of our profession introduced by him.

(ii) Shri Sorab E. Engineer — He was the first Articled student of Shri K. S. Aiyar. Later on Shri Engineer was proclaimed as the Guru of our First President Shri G. P. Kapadia.

(iii) Indian Accountancy Board — constituted in 1932 and was the regulator for ‘Registered Accountants’ (RA) till the C.A. Institute was formed on 1-7-1949. Shri G. P. Kapadia was the first member of C.A. Institute with his membership number as ‘one’.

(iv) Institute Logo — suggested by the great nationalist philosopher Shri Arbindo Ghosh.

(v) Shri A. E. Cama — First Indian to become member of C.A. Institute of England and Wales in 1908.

(vi) Journal of C.A. Institute — Journal started with eight-page Bulletin in January, 1950.

(vii) First C. A. Conference — Called by Chartered Accountants from Mumbai in September, 1951, under the presidentship of Shri G. P. Kapadia.

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

(i) Member-in-charge of office of C.A. Firm — It is clarified that only a partner or a C.A. full-time paid assistant can be appointed as a member-in-charge of office of C.A./C.A. Firm.
(page 9)

(ii) Educational Loan Scheme — ICAI has requested banks to give easy loans to C.A. students for joining C.A. course. Bank of Maharashtra, Oriental Bank of Commerce and IDBI Bank have introduced education loans under priority sector lending scheme. Other banks may give such loans to C.A. students. (page 11)

(iii) Entry Requirement for C.A. course — The Council of ICAI has decided to revise entry requirements to C.A. course. According to this decision, in the following cases exemption from CPT examination will be given and student will be allowed to join C.A. Articleship. (a) Commerce graduate with minimum of 55% and non-commerce graduate with minimum of 60% marks, (b) students who have passed Intermediate examination of ICAI/ICSI will be exempted from CPE examination and join Articleship on passing Gr. 1 of IPCC examination, (c) students who wish to join Accounting Technician Course will be exempted from CPT examination. These provisions will be implemented after approval by the Government. (page 10-11)

(iv) Announcements relating to Articled Assistants/Students

(a) Details about working hours of Articled Assistants are published on pages 176-177.

(b) Fees for obtaining duplicate statements of mark sheets for C.A. exams are increased from Rs.10 to Rs.100 per duplicate statement. (page 177)

(v) Campus Placement Programme

ICAI has organised campus placement for qualified members of the Institute at various places as under (page 177):

(a) Banglore, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi on 16th to 20th August, 2011.

(b) Bhubaneshwar, Coimbatore and Ernakulam on 1st and 2nd September, 2011.

(d) Ahmedabad and Jaipur on 5th to 7th September, 2011.

(e) Pune 9th, 10th and 12th September, 2011.

(vi) C.A. Final Examination Results
C.A. Final Results for May, 2011 examination have been announced on 19- 7-2011. It is reported that out of 10816 girls 2368 (21.9%) and out of 21603 boys 4277 (19.8%) have qualified as Chartered Accountants. In this examination Ms. Maitrayee Rajput, Arti Jain and Charmy Sheth have secured the first three top positions. This can be considered as a great achievement for the girl students of our Institute.

ICAI and its members

1. Finances of ICAI

Audited accounts of ICAI for the year ended 31-3-2011 have been recently released at the 62nd Annual Meeting held on 11-2-2012. The summarised position is as under.

2. Our New President and Vice-President

Shri Jaydeep Shah from Nagpur has been elected as President and Shri Subodh Kumar Agrawal from Kolkata has been elected as Vice-President of ICAI on 12th February. Our greetings and best wishes to both of them. We wish them a successful term of office in 2012-13.

3. New Committees of the Council

The Council of ICAI has formed seven standing committees and 31 other committees on 12-2-2012 for one year. Details of these committees are given on pages 1415 to 1421 of C.A. Journal for March, 2012.

(i) Standing Committees

Chairman and Vice-Chairman of the Executive, Examination, Finance and Disciplinary

Committee (u/s.21D) are Jaydeep Shah (President) and Subodh Kumar Agrawal (Vice-President), respectively. Chairman of Board of Discipline (u/s.21A), Disciplinary Committee (u/s.21B) and Disciplinary Committee — Satyam Bench (u/s.21B) is Jaydeep Shah (President).

(ii) Other Committees

Names of chairmen of some of the other committees are as under:

4. New office bearers of WIRC

The following new officer bearers of WIRC are elected for 2012-13:

5. EAC Opinion

Accounting for Sales Returns

Facts
A company has been in the business of manufacture of readymade garments for the last 5 to 6 years. It sells its products to franchisees located across the country. The company has stated that the sale is said to be completed at the time when risks and rewards of ownership of goods are transferred to the franchisees. Readymade garment industry is subject to change in trends of fashion and as such, some of the goods are returned and the company accepts them back as sales returns. According to the company, sales returns are said to be completed when the goods have been physically received back in the factory premises and all the risks and rewards of ownership have been transferred to the company. Hence, the company records the sales returns in its books of account on their physical receipt. On the basis of the past trend, sales returns work out to be approximately 20 to 22% of the sales for the year.

The company has further stated that the company has accounted for the sales return received during the financial year up to the balance sheet date but has not reversed the sales returns likely to be received after the balance sheet date, on the basis of past trend. During the course of audit for the financial year 2010-11, the auditors have raised an objection regarding booking of revenue from sales. The auditors are of the opinion that since there is a past trend indicating the return of goods sold to franchisees, the company should effect the reversal of sales on March 31, 2011 to the extent that the goods sold in the year 2010-11 are likely to be returned by the franchisees in the year 2011-12 and subsequent years.

Issue for consideration
On the basis of the above, the company seeks the opinion of the Expert Advisory Committee (EAC) on the question as to whether the present policy of the company regarding recognition of sales returns after the date of the balance sheet in the books of account only upon the physical receipt of goods from the franchisees is correct or should record the sales returns received after the date of the balance sheet on estimated basis taking into account the past trend?

Opinion

After considering para 11 of the Accounting Standard (AS) 9, ‘Revenue Recognition’ and paragraph 10 of Accounting Standard (AS) 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, the Committee is of the view that since obligation in respect of sales return can be estimated reliably on the basis of past experience and other relevant factors, such as fashion trends, etc., in the company’s case, a provision in respect of sales returns should be recognised. The provision should be measured as the best estimate of the loss expected to be incurred by the company in respect of such returns including any estimated incremental cost that would be necessary to resell the goods expected to be returned. The Commit-tee is also of the view that as per paragraph 52 of AS-29, provisions should be reviewed at each balance sheet date and, if necessary, should be adjusted to reflect the current best estimate. As far as actual sales returns that occur between the balance sheet date and the date of approval of financial statements are concerned, the Committee is of the view that necessary adjustments should be made in this regard to the amount of the provision.

(Refer pages 1355 to 1357 of C.A. Journal for March 2012)

6. Guidance Note on Accounting for Real Estate Transactions

The earlier Guidance Note on this subject issued by ICAI in 2006 has now been revised in 2012. The revised Guidance Note is published on pages 1436 to 1440 at C.A. Journal for March, 2012. AS -7 relating to ‘construction contracts’ applies to accounting by construction contractors. The revised guidance note deals with Accounting by ‘Real Estate Developers’, ‘Builders’ and ‘Property Developers’. It applies to all projects in real estate which commence on or after 1-4-2012 and also to projects which have commenced but revenue is being recognised for the first time on or after 1-4-2012.

7. Guidance Note on Accounting for Rate Regulated Activities

This is a new Guidance Note. The objective of this Guidance note is to recommend the recognition of a regulatory asset or regulatory liability if the regulator permits the entity to recover specific previously incurred costs or requires it to refund previously collected amounts and to earn a specified return on its regulated activities by adjusting the prices it charges to its customers.

The effective date for this Guidance Note will be announced later on. This Guidance Note is published on page 1442 to page 1447 of C.A. Jounral for March, 2012.

8. Guidance Note on Accounting for self– generated certified Emission Regulations

The objective of this Guidance Note is to provide guidance for accounting by entities generating carbon credits in India. It comes into force for accounting periods beginning on or after 1-4-2012. Text of the Guidance Note is on pages 1448 to 1453 of C.A. Journal for March, 2012.

9. ICAI News

(Note: Page Nos. given below are from C.A. Journal for March, 2012)

(i) Action Plan for 2012-13

Our new President has presented his action plan for his term of office. Details are given on pages 1310 to 1314. We hope the Council members and other concerned members will give him full co-operation to achieve his goals.

(ii) 62nd Annual Function of ICAI

62nd Annual Function of ICAI was held at New Delhi on 11-2-2012. Minister of Corporate Affiars Dr. M. Verrappa Moily inaugurated the function. Y. H. Malagam and T. N. Manoharan, Padmashree Awardees, were felicitated at the function. Details of the function are at pages 1322 to 1330.

(iii) Chartered Accountants (Amendment) Act, 2011

As reported in February issue of BCAS Journal, the above amendment Act was passed by the Parliament in December, 2011. It is now reported that this amendment Act has come into force with effect from 1-2-2012. (Refer page 1351)

(iv)CARO 2003 Report

It may be noted that under para 4(ix)(a) of CARO, 2003 Report, the statutory auditors are required to report on the matter relating to regularity of the company in depositing undisputed statutory cess. The statement on CARO, 2003, issued by ICAI has now been amended and it is clarified that till the Rules are prescribed u/s.441A of the Companies Act, the statutory auditors need not make any comment about depositing undisputed statutory cess. (Refer page 1422)

(v) Exposure draft

Exposure draft of Standard on Internal Audit (SIA), dealing with ‘Related Parties’ is published on pages 1454-1456. Last date for sending commends by members is 30-4-2012.

(vi) New ICAI publications

(a)   Implementation Guide to Standard on Auditing (SA) 530 ‘Audit Sampling’.
(b)   Implementation Guide to Materiality in Planning and Performing an Audit.
(c)   Guide on Environmental Audit.
(d)   Technical Guide on Stock and Receivable Audit.
(e)   Educational Material on Indian Accounting Standard (Ind AS)1, ‘Presentation of Financial Statements’.
(f)   Educational Material on Indian Accounting Standard (Ind AS)2, ‘Inventories’.
(g)   Compendium of Opinions (Volume XXIX).
(h)   Aspects of International Taxation — A study (Revised in 2012).

ICAI and its members

1. Disciplinary cases

It is reported that the Disciplinary Committee has given its decision and awarded punishment in the cases of Shri Srinivas Talluri, partner of M/s. Price-Waterhouse & Co., and Shri Srinivas Vadlamani, the former CFO of Satyam Computers. It is also reported that the Committee has held Shri Srinivas Talluri guilty of gross negligence in the performance of his duties as auditor and his membership is cancelled for life and a penalty of Rs.5 lac is imposed. Similarly, in the case of Shri Srinivas Vadlamani the Committee has barred him from attesting financial statements for life and also levied a penalty of Rs.5 lac.

2. EAC Opinion Accounting treatment of success fee paid to the financial advisors

Facts
A government company registered under the Companies Act 1956, is a wholly-owned subsidiary of listed government company. The shares of the company are not listed with any stock exchange. The company is engaged in activities relating to exploration and production of oil and gas. The company is holding participating interest (PI) in various oil and gas blocks. The company along with another company ‘V’ has acquired company ‘A’ in joint venture. Company ‘B’ is 100% subsidiary of company ‘A’, which holds the PI in oil and gas blocks in Brazil.

The company appointed financial advisors to carry out: (i) financial due diligence, (ii) develop a detailed financial model and other methodologies to determine the transaction value, (iii) analyse various risks associated with the projects, (iv) valuation of company/project, (v) assisting in appointment of technical, legal and tax consultants, (vi) listing out various financial options available to the company, and (vii) preparing the bidding strategy to acquire the proposed equity interest or participating interest by the seller.

For this purpose, the fees payable was a fixed fee of US $ 2,50,000; if for any reason the transaction does not consummate and a success fee of 0.70% of the bid price, payable on successful closure of the transaction. The company has pointed out that the fixed fees shall not be payable if engagement is commenced, but the financial advisors are unable to continue or complete the transaction for reasons attributable to them. Notwithstanding this, payment of fixed fees shall become due and payable only after 90 days from the date of signing of the agreement with them.

Thereafter, the financial advisors submitted the report along with the presentation and the same was deliberated upon by the company and company ‘V’. After the internal deliberations the strategy meeting between the company and company ‘V’ for acquiring company ‘B’ was held wherein it was decided to bid for the various basins held by company ‘B’. An amount of Rs.2,40,95,418, (being 0.70% of bid price of US $ 82.5 million) after TDS was paid, to the financial advisors against the bill of the financial due diligence, etc.

Query
The company has treated the above success fees as revenue expenditure in the books of the company. Whether the aforesaid treatment is correct? If not, then what is the correct accounting treatment?

Opinion
The EAC noted that the underlying assets (PI) are not in the books of the company. The expenditure on account of success fees was incurred at the bidding process stage before the formation/ incorporation of company ‘A’. The success fee has relation to bidding process for PI and has no relation to the acquisition of equity shares in company ‘A’. Hence, the company has incurred the expenditure on fee to financial advisors for a commercial advantage which is to be availed through its joint venture company ‘A’, in whose books, the investment in company ‘B’ would appear. After considering paragraphs 28, 29 and 32 of Accounting Standard (AS) 13, ‘Accounting for Investment’ the committee took the view that in the present case the expenditure on fee paid to financial advisors cannot be included in the ‘cost of Investment’ at the time of initial recognition. Such expenditure also does not become part of carrying amount of the investment in the shares of company ‘A’ as the investment is to be carried at cost, with only diminution to be recognised under certain circumstances. Further, the committee noted that the term ‘asset’ has been defined in the Framework for the Preparation and Presentation of Financial Statements, issued by the Institute of Chartered Accountants of India as “a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise”. Therefore, the committee is of the view that expenditure on fixed fee and success fee does not result into a resource control by the company and accordingly, it cannot be capitalised as an asset.

In view of the above, the expenditure on ‘fixed fee’ and ‘success fee’ incurred by the company does not meet the definition of an asset and should be expensed in the statement of profit and loss. Therefore, the treatment given by the company in its books of account is correct.

(Refer page Nos. 1202 to 1204 of C.A. Journal, February 2012) 3.

Results of Final C.A. Examination — Nov. 2011

Results of the above examination were declared in January, 2012. Analysis of the results of examinations held in last two years are as under.

4. Campus placement February-March, 2012 ICAI has organised campus placement programme for the newly qualified Chartered Accountants during February-March, 2012, at 17 centres. Detailed announcement about this programme is available

at www.cmii.icai.org. The places and dates are as under. The newly qualified members can take advantage of this facility at their respective cities.

(i) Baroda, Chandigarh, Indore, Kanpur and Nagpur 22-23 February, 2012

(ii) Bhuvaneshwar, Coimbatore and Ernakulam 23-24 February, 2012

(iii) Ahmedabad, Jaipur and Pune 27-29 February, 2012

(iv) Chennai, Mumbai and New Delhi 26-31 March, 2012

(v) Banglore, Hyderabad and Kolkata 28-31 March, 2012 (Refer page 1279 of C.A. Journal for February, 2012)

5. ICAI News

(Note :Page Nos. given below are from C.A. Journal for February, 2012)

(i) Vision 2030

ICAI has released ‘ICAI Vision 2030’ at its Annual Function held on 11-2-2012. Copies can be obtained from ICAI office. (Page 1142)

(ii) Health Insurance from members and students

ICAI has tied up with New India Assurance Co. Ltd. for launching a special scheme for members and C.A. students. Details are available at www. icai.org.in (Page 1142).

iii) New branches of ICAI

Following new branches have been opened by ICAI.
(a) Kannur branch (SIRC)
(b) Shivkashi branch (SIRC) (Page 1286)

(iv) New branch buildings of ICAI
Following new buildings have been inaugurated at branches of ICAI (SIRC):
(a) Coimbatore
(b) Nellore
(c) Madurai (Page 1142)

(v) Revision of fees payable to Expert Advisory Committee (EAC)

EAC of ICAI is giving opinions on Accounting and Audit Issues to members and others. At present, a fee of Rs.25,000 is required to be paid to EAC for each opinion. This fee is now enhanced to Rs.50,000 w.e.f. 10-1-2012 in cases which relate to an enterprise whose equity capital or debt securities are listed on the stock exchanges. Further, the increased fees are also payable in cases where the enterprise is having annual turnover exceeding Rs.50 crore based on the accounts of the year ending on a date immediately preceding the date of sending the query. In all other cases a fee of Rs.25,000 will be payable.

ICAI and its members

1. Attendance by Directors at Board Meetings through video conference:

By a General Circular No. 28/2011, dated 20-5-2011, the Ministry of Corporate Affairs has now permitted directors of companies to attend meetings of the Board of Directors or Committee thereof through electronic mode. Some of the procedural requirements are as under:

(i) Electronic mode means video conference facility i.e., audio-visual electronic communication facility employed which enables all persons participating in that meeting to communicate concurrently with each other without an intermediary, and to participate effectively in the meeting.

(ii) Every director of the company must attend the meeting of Board/Committee of directors personally at least one meeting in a financial year of the company.

(iii) The chairman of the meeting and secretary have to ensure to (a) safeguard the integrity of the meeting via video conferencing, (b) ensure proper video conference equipment/facilities, (c) prepare the minutes of the meeting, and (d) ensure that no one other than concerned director or other authorised participants are attending the meeting through electronic mode.

(iv) The notice of the meeting must inform directors regarding availability of participation through video conference, and provide necessary information to enable directors to access the available facility of video conferencing.

(v) The notice of the meeting shall also seek confirmation from the director as to whether he will attend the meeting physically or through electronic mode and shall also contain the contact number(s)/e-mail addresses of the secretary/designated officer to whom the director shall confirm in this regard.

(vi) In the absence of any confirmation from the director, it will be presumed that he will physically attend the Board meeting.

(vii) There are some other procedural requirements which are of a routine nature.

2. Appointment of Cost Auditors by companies:

By a General Circular No. 15/2011, dated 11-4-2011 the Ministry of Corporate Affairs has changed the procedure for appointment of Cost Auditors u/s. 233B of the Companies Act. At present, such appointment requires prior approval of the Central Government. Now the revised procedure, briefly stated, is as under:

(i) The Audit Committee will have recommend to the Board the name of the Cost Auditors for such appointment and for their remuneration.

(ii) The Company has to file its application in Form 23C for such appointment with Board resolution proposing such appointment and other prescribed annexures within 90 days of commencement of the financial year.

(iii) If the Government does not object within 30 days of filing Form 23C, the company can issue formal letter of appointment to the Cost Auditors. In other words, specific order of the Central Government is not required for appointment of Cost Auditors.

3. Scope of Cost Audit enlarged:

By a Notification dated 3-6-2011, the Ministry of Corporate Affairs has enlarged the requirement for maintenance of Cost Records and Cost Audit to all large companies. The earlier Cost Accounting Rules have been now superseded by this Notification. Briefly stated the Notification provides as under:

(i) The new (Cost Accounting Records) Rules, 2011, shall come into force on the date of its publication in the Official Gazette.

(ii) These Rules apply to every company (including a foreign company) engaged in production, processing, manufacturing or mining activities if the net worth of the company as on the last day of the immediately preceding financial year exceed Rs.5 crore or if the total turnover of the company in the immediately preceeding financial year exceed Rs.20 crore. Further, if the company is a listed company or is in the process of listing, either in India or outside India, these Rules will apply irrespective of its net worth or turnover limits, if it is engaged in the manufacturing, production, processing or mining activities.

(iii) These Rules will not apply to a company engaged in manufacturing, production, etc. of (a) bulk drugs, (b) formulations, (c) fertilisers, (d) sugar, (e) industrial alcohol, (f) electricity industry, (g) petroleum industry and (h) telecommunications. The existing Rules for each of these industries will continue to apply to them.

(iv) The companies to which these Rules apply will have to maintain cost records as stated in this new Rule.

(v) These companies will have to appoint Cost Auditors and file Cost Audit Report with the Government for each year commencing on or after 1-4-2011 in the prescribed form within 180 days of the close of the financial year.

From the above it will be noticed that statutory Auditors of all such companies will have to ensure that these requirements of maintenance of Cost Accounting Records and Cost Audit are complied with in all such companies.

4. EAC Opinion

Revenue recognition in high-sea sale contracts:

Facts:
A public sector undertaking in the field of telecommunications is engaged in manufacturing and supply of various telecom products, providing network solution, manufacturing of mobile infrastructure equipment, etc. The company is having manufacturing facilities at various locations. The supplies and services of the company are mainly to customers such as public sector telecommunication enterprises, defence, railways, etc. All the supplies and services to them are executed through purchase orders, which are generally based on tenders. Most of the tenders call for quotes which are all inclusive (inclusive of freight, insurance, etc.)

The company has stated that it received a Purchase Order (P.O.) from a public sector telecommunication enterprise for supply and installation, testing and commissioning of cellular mobile phone network. Customer P.O. price is inclusive of all levies and taxes, packing, forwarding, freight and insurance, etc. The scope of P.O. includes supply of equipment (which shall be imported and supplied on high-sea sales basis), installation and commissioning of the equipment, maintenance during warranty period and Annual Maintenance Contracts (AMC) after warranty period. Customer’s P.O. contains itemised rates for supply, testing, installation, etc.

The company has further stated that before the materials reached Indian territory, high-sea sales agreement was entered into with the customer and the sale is effected in favour of the customer’s designated sites. Based on the high-sea sales agreement, the documents during the course of transit are endorsed in favour of the customer.

According to the company, as soon as the highsea sales agreement is entered into, the company recognises revenue for the sale value of the equipment (as per separate value given in the customer’s P.O.) During the financial year 2008- 09, the company made supplies and revenue was recognised in the accounts to that extent. However, this accounting treatment was not acceptable to the Government Auditors on account of the following:

(i) Materials which were supplied on high-sea sales basis on March 30, 2009 were received by customer after the accounting year 2008- 09.

(ii) As per P.O., delivery to the ultimate site in satisfactory condition will remain supplier’s responsibility.

(iii) Delivery of materials and services, its instal- lation and commissioning shall be made by the supplier in accordance with the terms and conditions specified in schedule of requirements and special conditions of the contract and the goods shall remain at the risk of the supplier until delivery of the network as a turnkey job has been completed even if there is a transfer of title of the goods earlier on account of high-sea sales.

Query:

In view of the above, the company has sought the opinion of the Expert Advisory Committee (EAC) as to whether accounting for the sale value of equipment immediately on entering into high-sea sales agreement and endorsement of the documents of title without linking to the date of receipt of equipment by customer and also before completion of activity of installation and commissioning of the equipment is in order and in accordance with Accounting Standard (AS) 9, ‘Revenue Recognition’.

Opinion:
The Committee is of the view, after considering the Accounting Standard (AS) 9, ‘Revenue Recognition’, that the company recognises revenue for the sale value of the equipment immediately on entering into the high-sea sales agreement and endorsement of the documents of title. It is also noted that as per clause 16.2 of the customer’s P.O. “Delivery of the goods and services, its installation and commissioning shall be made by the supplier in accordance with the terms and conditions specified in the schedule of requirements and special conditions of the contract and the goods shall remain at the risk of the supplier until delivery of the network as a turn-key job has been completed even if there is a transfer of title of the goods/materials earlier on account of high-sea sales”. Thus, the Committee is of the view that risks and rewards of ownership of the goods under high-sea sales are not transferred at the time of entering into such an agreement or endorsement of the documents of title. Accordingly, the accounting policy followed by the company in this respect is not appropriate.

5. Transfer/Termination of articleship:
Articled assistants are allowed to seek transfer/ termination of articleship only on permissible grounds and the articled assistants are advised to get the consent of the Institute before getting Form 109 signed by the principal in their own interest. ICAI has noticed that some articled assistants are submitting Form 109 signed by the principal along with the application for transfer/ termination of articleship. It is now decided that issuance of Form 109 prior to formal approval of the Institute for transfer will not be taken on record. Therefore, the principal and articled assistant should now forward Form 109 duly signed by both only after obtaining prior permission of the Institute for such Transfer/Termination. (CA Journal for June 2011 P. 1889)

6. ICAI News:

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

(i) Recommended fees structure for C.A. Professionals:

In the last issue of BCA Journal for May, 2011 (Page 360) reference was made to the fees structure recommended by ICAI. Some figures were given in that issue. Now C.A. Journal for June, 2011, contains complete details about the fees structure on pages 1894 to 1898.

(ii) Amendment to Accounting Standard (AS-11):

The Ministry of Corporate Affairs (MCA) has issued a Notification on 11-5-2011. By this Notification the MCA has extended option for the enterprises to capitalise the exchange differences arising on reporting of long-term foreign currency monetary items till 31-3-2012 instead of 31-3-2011. (CA Student’s Journal, June 2011, P. 26)

(iii) NBFC cannot join partnership firms as a partner:

RBI has issued a Circular on 31-3-2011 clarifying that no NBFC can join any partnership firm as a partner. This restriction will apply if any NBFC wants to join any LLP as a partner. (Page 1788)

ICAI and its members

1. Code of Ethics
The Ethical Standards Board of ICAI has given answers to some of the ethical issues raised by our members. These are published on pages 254-256 of CA. Journal for August, 2012. Some of these issues are as under:

(i) 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?

As per Para (c) under Clause (6) of Part 1 of First Schedule to the 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.

(ii) Issue:

Whether the word “Chartered Accountants” and name of city after the name of the members of the Institute be mentioned in the articles contributed by such members and published in the Institute’s Journal?

Under Clause (6) of Part 1 of the First Schedule to the Act, there is no restriction in the Code of Ethics for mentioning the word “Chartered Accountant” and also the name of city in an article contributed by a member in the Institute’s Journal as well as in newspapers and other periodicals.

(iii) Issue:

Whether sponsorship or prizes can be instituted in the name of Chartered Accountants or a firm of Chartered Accountants?

An individual Chartered Accountant or a firm of Chartered Accountants can institute or sponsor prizes, provided that the designation “Chartered Accountant”, is not appended to the prize and the Clause (6) of the First Schedule regarding advertisement and publicity is complied with.

(iv) Issue:
Can a Chartered Accountants firm give advertisement in relation to Silver, Diamond, Platinum or Centenary celebration of the firm?

While considering the implications of Clause (6) & (7) of Part 1 of the First Schedule of the Act in relation to such advertisements and also the need of interpersonal socialisation/relationship of the members through such get-together occasions, the advertisement for Silver, Diamond, Platinum and Centenary celebrations of the firms has been permitted to be published in any newspaper or in the newsletters.

(v) Issue:
A Chartered Accountants firm issued circulars to the non-clients that a Chartered Accountant who was the former partner in-charge of Taxation of one of the largest accounting firms of the world, had joined them as partner. Can they do it?

Clause (6) of Part 1 of the First Schedule to the Act prohibits solicitation of clients or performing work either directly or indirectly by circular, advertisement, personal communication or interview or by any “other means”. The issuance of circular to persons who are not clients, but may likely require services of a chartered accountant would be tantamount to advertisement, since it is solicitation of professional work by making roving enquiries. As per Clause (7) of Part 1 of the First Schedule to the Act, the usage of the words “one of the largest accounting firms of the World” and the specification of specialisation in “taxation” would also amount to advertisement and, thus, constitute professional misconduct.

2. EAC Opinion
Accounting Treatment of Liability for Unbilled Work-in-Progress in the Books of Executing Agency.

Facts:
A government company was set up as a special purpose vehicle for executing the infrastructure development and related projects in a State with quality and speed. The projects are identified by the Government and these projects are entrusted for execution to the company.

For executing the projects, the company engages the services of various contractors who are required to use their own men, materials and machines and the company does not supply any of these. The company has also clarified that it has not received the projects from the Government in the capacity of a contractor, rather, the Government has entrusted the work in the capacity of executing agency through Memorandum of Understanding (MOU). The projects have not been sub-contracted by the company. Further, as per the company, the ownership interest relating to contract assets and liabilities vest with the Government.

The company is not raising any bill for the work executed by it. The company is charging development fees at certain pre-fixed percentage of the development expenditure incurred, to the Government towards the services rendered.

As per agreed terms of contract, the contractor raises running account (R.A.) bills on the company for the work done by him and final bill is raised after completion of the project. The billing period generally falls into two or more financial years.

The company is providing for the liability towards work executed upto the financial year end based on bills received till the finalisation of accounts. However, on the basis of advice from the Comptroller and Auditor General of India (CAG), the company started providing for work executed till financial year end towards the work for which bills have not been received on the basis of estimated value worked out by the engineering department of the company.

Query:
On the above facts, the company has sought the opinion of the Expert Advisory Committee as to whether or not the company should recognise liability in respect of unbilled work-in-progress.

Opinion:
The Committee notes from the Facts of the Case that the company in this case is acting merely as an execution agency of the Government, for which it is getting a development fee for rendering its services. The Committee further notes that the terms ‘Assets’ and ‘Liabilities’ are defined in paragraphs 49(a) and 49(b) respectively of the ‘Framework for the Preparation and Presentation of Financial Statements’.

After considering the said paragraphs, the Committee notes that in this case, the future economic benefits from the project assets are not expected to flow to the company. On completion of the project, the assets would be taken over by the Government. Further, the Committee notes from the MOU between the company and the Government that the project assets are not funded by the company. In substance, they are funded by the Government. Accordingly, the liabilities which arise during the transactions are those of the Government and not that of the company. Thus, all the significant risks and rewards relating to the ownership of project assets and liabilities vest with the Government. In so far as the company is concerned, the Committee is of the view that the project assets and project liabilities do not meet the definitions of “Assets and Liability” respectively and as such, the project assets and liabilities of the said business should not be recorded in the books of account of the company.

On the basis of the above, the Committee is of the view that the liability for work-in-progress and the corresponding asset, viz. the work-in-progress (billed or unbilled) in respect of the project, if any, should not be recognized in the books of account of the company.

[Pl. refer pages 287 to 289 of C. A. Journal of August, 2012]

3. Examination Results

(i) Results for CA Final Examination held in May, 2012, were declared in July, 2012. 16.38% candidates passed in Both Groups. 25.32% candidates passed in Group I and 29.62% passed in Group II. Abhishek Gupta (Kolkata), Divyang Bhandari (Chennai) and Shruti Sodhani (Bangalore) secured 1st , 2nd , and 3rd Rank respectively in the Final Examination.

(ii) Results for CPT examination held on 17-6-2012 have been declared. 37.56% of candidates passed in this examination. Girls have taken a lead over Boys by a margin of 2% i.e. 40.04% against 37.56%

(Refer Page 238 of CA Journal of August, 2012.)

4. Elections to Regional and Central Council

The next elections to the Central Council and Regional Councils of ICAI are scheduled to be held on Friday, 7th December and Saturday, 8th December, 2012 in cities having more than 2,500 Members. In other places, the elections will be held on Saturday, 8th December, 2012. Members from Mumbai, Kolkata and New Delhi, where there are more than one polling booth, have option to select the booth of their choice. For this purpose, they have to exercise option in writing before the specified date. Full details about the procedure for elections is hosted on ICAI website www.icai.org (Refer Page 362 of CA Journal of August, 2012).

5. ICAI News

(Note : Page Nos. given below are from CA Journal of August, 2012)

(i) New ICAI Publications

(a) Compendium of Accounting Standards (Up dated as on 1-7-2012) (P. 376)

(b) Technical Guide on Internal Audit of Infrastructure Industry (P. 377)

(d) Technical Guide on Internal Audit of Mining and Extractive Industry (P. 378)

(ii) Annual Membership Fees

Annual Membership Fees for 2012-13 can be paid on or before 30-9-2012 (P. 387)

(iii) Certificate Courses

Members can take advantage of Certificate Courses conducted by ICAI, including those on Indirect Taxes, Enterprise Risk Management, Concurrent Audit of Banks, Internal Audit, Master in Business Finance, International Taxation, Forensic Accounting & Fraud Detection using IT & CAATs and International Financial Reporting Standards. Interested members must consult ICAI website for the list of the complete courses available. Many post-qualification courses are available to promote and enhance members’ career prospects. List of these courses include Information Systems Audit (ISA), CPE Course on Computer Accounting and Auditing Techniques (CAAT), Diploma in Insurance and Risk Management (DIRM), etc.: for complete list of such courses, members must refer to ICAI website (Page 250).

(iv) International Assignments

Members interested in international assisnments can take advantage of the existing memorandums of understanding (MoUs), mutual recognition agree-ment (MRAs), and joint declarations of ICAI with international institutions. The list is available on the ICAI website. At present, there is an MRA with The Canadian Institute of Chartered Accountants (CICA), CPA Australia and CPA Ireland. ICAI has MoUs with The Institute of Chartered Accountants in Australia (ICAA), The Institute of Chartered Accountants in England and Wales (ICAEW), Higher Colleges Of Technology, Ministry Of Higher Education And Scientific Research, UAE, and University of Djbouti. ICAI has signed a joint declaration with the Bahrain Institute of Banking and Finance and a License Agreement with ISACA (Page 250).

ICAI and its members

1. ICAI Elections – December 2012

(i) By a Notification dated 5-9-2012, Secretary, ICAI, has notified that the elections to the Central and Regional Councils of ICAI will be held on 7th and 8th December, 2012, in the cities of Ahmedabad, Bengaluru, Chennai, Delhi/New Delhi, Gurgaon, Hyderabad, Jaipur, Kolkata, Mumbai & Pune, Polling will be held on 7th and 8th December. In other places the Polling will be on 7th December only. Results will be declared on 9th January, 2013.

(ii) The number of candidates to be elected will be as under:

(iii) A candidate for Central Council has to pay a fee of Rs. 5,000/- and also provide Security Deposit of Rs. 20,000/-. Fees for candidates for Regional Council is Rs. 2,500/- and Security Deposit is Rs. 10,000/-. The Security Deposit will be forfeited if the candidate for Central Council does not get 2% of valid First Preference votes polled. Similarly, a candidate for Regional Council will forfeit the deposit if he does not get 1% of valid First Preference Votes.

(iv) CA Election Rules provide for compliance with a strict code of conduct by the candidates. A candidate for Central Council cannot incur expenditure exceeding Rs. 6 lakh. Similar limit for candidate for Regional Council is Rs. 4 lakh. All candidates have to file details of expenses with ICAI within 15 days of announcement of results of the elections. Disciplinary action will be taken against a candidate who violates the code of conduct provided for the candidates.

(v) Briefly stated’ the code of conduct for elections to ICAI Councils put restrictions on candidates as under:

(a) Restrictions on addressing conferences, seminars, study circle meetings etc. of our members.
(b) Restrictions on addressing meetings organised by other Trade and Professional Associations.
(c) No gifts, refreshments, parties etc. can be given to voters.
(d) Only one Manifesto/Circular or appeal seeking vote in the election can be issued.
(e) No separate website can be maintained for the election.
(f) Restriction on publication in News Papers, Magazines etc. about candidature of the members.

(vi) Sometimes, our members have a grievance that the institute is not doing enough to address their problems. It is, therefore, necessary for our members to elect a strong Council at the centre as well as at the regional level. This is possible only if each and every member of the Institute considers it to be his/her bounden duty to elect the right type of candidates to the Council. A member should consider whether the candidate will be able to contribute to the cause of the profession and devote time for the activities of the Institute. Integrity, honesty and ability to stick to the right path are the qualities of a good candidate, which should be our touchstone in selecting the right type of candidate in this election. A voter should not be carried away by innovative methods of canvassing adopted by some candidates. It may be noted that, as stated earlier, strict Election Code of Conduct has been introduced and a ceiling on election expenses to be incurred by each candidate is fixed. Our members should ensure that if a candidate is found to be canvassing for votes in a manner which violates the Election code of conduct, it should be brought to the notice of the Secretary to ICAI.

(viii) In elections of this type, each vote is valuable. Our elections are held on the ‘single transferable vote system, under which the voter has to indicate preference about the candidates by inserting figures 1,2,3 etc. against the names of candidates according to his/her preference. Some members are under the impression that only the ‘first preference’ vote is of value. This impression is not correct. A candidate is required to obtain only a specific number of first preference votes for getting himself elected. If the first preference votes obtained by him are more than the required number, the excess is transferred, at appropriate value, to the candidates who have secured 2nd, 3rd, 4th, etc. preferences. If a voter exercises only his/her first preference for a particular candidate and does not mark subsequent preferences and that candidate gets more than the required first preference votes, the balance of votes will go waste. Similarly, if the number of first preference votes received by the candidate are much below the required quota, candidates getting subsequent preferences will get an advantage by way of transfer of such votes at appropriate value. It is, therefore, essential to note that a voter should not select only one candidate of his choice, but should select as many candidates as possible and mark his preferences for such candidates. It may be noted that by giving second or subsequent preferences, the position of the candidate to whom the first preference vote is given will not be jeopardised. By giving subsequent preferences’s the voter will be able to get at least one of the candidates of his choice elected.

2. EAC Opinion

Provision for Warranty under Construction Contract and Corresponding Revenue Recognition:

Facts:
A public sector company (company) is engaged in the field of engineering, manufacture of equipment, erection and commissioning of power projects. In addition, the company is also in the business of transportation, transmission, defence, etc. The normal execution period of a contract ranges between three and five years. The normal warrantee/ guarantee period of a contract is between 18 and 24 months, which starts from the date of completion of trial operation of the project.

The Company has stated that the revenue recognition in respect of long term construction contracts is done based on percentage of completion method in line with the requirements of Accounting Standard (AS) 7, ‘Construction Contracts’. The warranty obligation is created at 2.5% of the contract value based on past trends.

The Company has stated that provision is created towards warranty obligation at 2.5% of the revenue progressively as and when the revenue is recognised and the same is added to ‘actual cost incurred’ upto reporting period for working out percentage of completion under AS 7 contracts. 2.5% of the contract value is also added towards warranty obligation to the ‘total estimated cost’ to complete the work for percentage completion method.

Query:
The company has sought the opinion of the Expert Advisory Committee as to whether the present policy and practice of the company on ‘provision for warranties’, viz. creation of provision towards warranty obligation progressively during construction period and considering the same as “cost incurred” to determine the percentage of completion for revenue recognition under AS 7 is in the line with the requirements of accounting standards?

Opinion:

After considering paragraphs 11 and 14 of AS 29, notified under the Rules, EAC is of the view that a provision should be recognised when there exists present obligation to act or perform in a certain way and other conditions for its recognition under AS 29 are satisfied. Obligation may arise from a binding contract or statutory requirement and may also arise from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner. From the Facts of the Case, it is evident that all the contracts of the company provide for warranty for periods ranging between 12 and 24 months and while executing the contract over a period of 3 to 4 years, the company is always bound to rectify, rework and compensate any defects, short supplies, operational problems of the individual equipment already supplied under construction contracts. Thus, there exists a contractual/customary present obligation in respect of warranty service, which will require outflow of resources embodying economic benefits to settle the obligation. Further, EAC notes that, in the present case, the company can make reliable estimate of the amount of obligation on the basis of past trend. Accordingly, EAC is of the view that a provision in respect of warranty service should be recognised in the extant case of the company.

Further, as regards the timing of recognition of provision, EAC notes paragraphs 15, 16 and 21 of AS 7. After considering the same, EAC is of the view that the expected warranty cost is a contract cost which is directly related to a specific contract. When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively, by reference to the stage of completion of the contract activity at the balance sheet date. In the present case, the company follows the percentage of completion method for recognising its revenue, which indicates that the outcome of a construction contract can be estimated reliably. Accordingly, following the percentage of completion method, the contract costs, including provision for expected warranty costs, should be recognised by reference to stage of completion of the contract activity at the reporting date.

[Pl. refer pages 596 to 599 of C. A. Journal – October, 2012]

3. Campus Placement Programme – September 2012

ICAI had organised the Campus Placement Programme for new members of the profession in August – September, 2012. This programme was held at Ahmedabad, Bengaluru, Baroda, Bhubaneshwar, Chennai, Coimbatore, Ernakulam, Hyderabad, Indore, Jaipur, Kanpur, Kolkata, Mumbai, Nagpur, New Delhi, Pune etc. Briefly stated, the result of this programme is as under.

(i) Number of candidates Registered (9382), Interview Teams (86) and Organisations (53);

(ii) Highest salary offered for – Domestic Assignments Rs. 13.77 lakh p.a.

– International Assignments Rs. 16.70 lacs p.a.

(iii) Minimum salary Rs. 4 lakh p.a.

(iv) Number of candidates who got jobs in (a) February/March Programme (933) and (b) August/September Programme (497).

(v) Highest number of jobs offered were in New Delhi (160) and Mumbai (100). Jobs offered in Chennai were (63) and Bengaluru (55).

(Refer pages 671-672 of C.A. Journal for October, 2012)

4. ICAI News

(i) ICAI Publications

(a) Guide to reporting on Pro Forma Financial-Statements.

(b) Compendium of statements on Auditing and Guidance Note (3 volumes) (As on 1-8-2012)

(d) Data Analytics and Continuous Controls Monitoring.

(e) Technical Guide and Internal Audit to Tendering Process.

(f) Guide on Corporate Social Responsibility.

(Refer pages 691 to 696 of CA Journal for October, 2012)

(ii) Some Ethical Issues

Ethical Standards Board of ICAI has answered some questions on Ethical Issues at page 558 of C.A. Journal for October, 2012.

ICAI and its members

1. Code of Ethics:

The Ethical Standards Board of ICAI has given answers to some of the Ethical Issues raised by our members. These are published on pages 726-728 of the CA Journal for November, 2012. Some of these issues are as under:-

(i) Issue: Whether a Chartered Accountant who is appointed as tax auditor for conducting special audit under the Income-tax Act by the IT Authorities is required to communicate with statutory auditor?

Comment: Council direction under Clause (8) of Part I of First Schedule to the Act, prescribes that it would be a healthy practice, if a tax auditor appointed for conducting special audit under the Income-tax Act, communicates with the members who have conducted the statutory/tax audit.

(ii) Issue: Whether it is obligatory for the auditor appointed to conduct a special Audit u/s. 233A of the Companies Act, 1956 to communicate with the previous auditor, who has conducted the regular audit for the period covered by the special audit.

Comment: Council direction under Clause (8) of Part 1 of the First Schedule to the Act prescribes that it is not obligatory for the auditor appointed to conduct a special audit u/s. 233A of Companies Act, 1956 to communicate with the previous auditor who has conducted the regular audit for the period covered by the special audit.

(iii) Issue: Whether communication with previous auditor is necessary in case of appointment as statutory auditor by nationalised and other banks?

Comment: Clause (8) of Part 1 of the First Schedule to the Act is equally applicable in the case of nationalised and other banks and also to Government agencies.

(iv) Issue: Whether communication by the incoming auditor is mandatory with the previous auditor in respect of various audit assignments, like the concurrent audit, revenue audit, tax audit and special audits, etc?

Comment: The requirement for communicating with the previous auditor would apply to all types of audits viz. statutory audit, tax audit, internal audit, concurrent audit or any other kind of audit. The Council has laid down detailed guidelines in this regard and the same are appearing at pages 166-168 in the Code of Ethics, 2009 edition.

(v) Issue: Whether a Chartered Accountant or a firm of Chartered Accountants can charge or offer to charge professional fees based on a percentage of turnovers?

Comment: In terms of Clause (10) of Part 1 of First Schedule to the Act, it is not permitted to a Chartered Accountant or a firm of Chartered Accountants to charge fees as a percentage of turnover, except in the circumstances provided under Regulation 192 of the CA Regulations, 1988.

“192, Restriction on fees

No Chartered Accountant in practice shall charge or offer to charge, accept or offer to accept, in respect of any professional work, fees which are based on a percentage of profits, or which are contingent upon the findings, or results of such work.

Provided that:
(a) in the case of a receiver or a liquidator, the fees may be based on a percentage of the realisation or disbursement of the assets;

(b) in the case of an auditor of a co-operative society, the fees may be based on a percentage of the paid up capital or the working capital or the gross or net income or profits; and

(c) in the case of a valuer for the purposes of direct taxes and duties, the fees may be based on a percentage of the value of the property valued”.

(vi) Issue: Whether a statutory auditor can be appointed in the adjourned meeting in place of existing statutory auditor, where no special notice for removal or replacement of the retiring auditor is received at the time of the original meeting.

Comment: If any AGM is adjourned without appointing an auditor, no special notice for removal or replacement of the retiring auditor received after the adjournment can be taken note of and acted upon by the Company. U/s 190(1) of the Companies Act, such special notice can be given to the company at least 14 days before the meeting. In this section, reference is to the original meeting and not to an adjourned meeting.

2. EAC Opinion:

Facts:
A company is a wholly owned subsidiary of a listed public sector undertaking (‘the holding company’). The company was incorporated in the year 2002 under the Companies Act. The main object of the company, inter alia, is to acquire, establish and operate electrical systems etc. for distribution and supply of electrical energy, to undertake works on behalf of others and to act as engineers/consultants.

The company has stated that all the personnel of the company are employees on the rolls of the holding company and are under deputation to the company on Secondment basis. Every month, actual share of employees related expenses of the company, like salary, provident fund (PF) contribution, etc. are being debited to the company by the holding company, for payments and accounting purpose. Other employee benefits like retirement benefits are allocated at the year end and accordingly accounted for in the accounts of the company, payable to the holding company. The holding company has constituted separate trusts and administering and managing employee benefits towards gratuity and provident fund.

The company has further stated that the holding company gets the actuarial valuation done, at the year end, for all of its employees together, including those deputed to its subsidiary companies. In other words, no separate valuation report is obtained for the employees of subsidiary companies. Therefore, identifying employee liability and corresponding plan assets attributable to the personnel on deputation to its subsidiaries is not possible. However, the amount being proportionate share of expenses (for the year under consideration) is determined by the actuary and allocated to the subsidiary companies for accounting purpose. Therefore, the company and the auditor of the company rely upon the allocated figure for recognising expenses in the profit and loss account of the company. As a corollary, all the other information required to be disclosed as per paragraphs 119 and 120 of Accounting Standard (AS) 15, ‘Employee Benefits’ is not available, and is not disclosed in the Notes on Accounts. The expenses on account of long term defined benefits included for actuarial valuation are gratuity, leave encashment, post retirement medical benefits, transfer/travelling allowance on retirement/death, long service awards to employees, farewell gift on retirement of economic rehabilitation scheme.

In the case of provident fund, however, the accounting is done on the basis of actual contribution, although the holding company in its financial statements admits it as a defined benefit. The company is of the view that actuarial valuation is not required for provident fund liability. Further, the holding company (sponsor employer) is not making disclosures in its financials as required by paragraphs 19 to 120 of AS 15 in the case of provident fund, unlike in the case of other defined benefits.

Query
On these facts, the company has sought the opinion of the EAC on the issue: (i) whether the position of the company that it is not liable to make complete disclosure in its separate financial statements, in view of the facts that the same have been done by the holding company, is correct? and (ii) Whether the company’s policy of accounting for the provident fund based on actual contribution instead of actuarial valuation basis (and not making disclosures even in its parent’s financial as a defined benefit, as required in paragraph 119 and 120 of AS 15) is correct?

Opinion:
After considering paragraphs 33 to 35 of AS 15, the Committee is of the view that the multi-employer and group administration plans are completely different from each other. In case of group administration plan, it is merely an aggregation of individual employer plans and therefore, the Standard itself states that the accounting related information is readily available with the participating enterprises as any other single employer. Further, the Committee notes from the Facts of the Case that in the case of the company, the holding company gets the actuarial valuation done, at the year end, for all of its employees, including those deputed to its subsidiary companies. The amount being proportionate share of expenses (for the year under consideration) is determined by the actuary and allocated to the subsidiary companies for accounting purpose. This indicates that there is a contractual agreement or stated policy based on which the proportionate issue of expenses is being allocated to the subsidiary company. Further, since there is a common scheme for the employees of the holding company and the subsidiary company, keeping in view the Facts of the Case, it appears to the Committee that in substance, the holding company is running a group administration plan.

The Committee is further of the view that the existence of such contractual agreement or stated policy through which the current service costs and obligations of defined benefit plans for employees of subsidiary company are being allocated to it clearly provides a basis for allocating the assets and obligation of the plan too. The Committee is also of the view that in case there is no such contractual agreement or stated policy to bear entire obligation relating to the employee, as per paragraph 35 of AS 15, the net defined benefit cost should be recognised in the financial statements of the enterprise which is legally the sponsor employer (holding company in the extant case) for plan and other group enterprise (subsidiary company in the extant case) should recognise a cost equal to their contribution payable for the period. Therefore, the contention of the company that it is not liable to make complete disclosures in its financial statements, in view of the fact that the same have been done by the holding company, is not correct.

With regards to accounting for contribution being made to provident fund trust, administered by the holding company, the Committee notes paragraphs 25 to 27 of AS 15 and Issue No. 9 of ‘ASB Guidance on Implementing AS 15, Employee Benefits (revised) 2005, issued by the Accounting Standard Board of the ICAI, and is of the view that (EPF) Act, 1952 empowers the Government to exempt any establishment from the provisions of the Employees’ Provident Scheme, 1952 provided that the rules of the provident fund set up by the establishment are not less favourable than those specified in section 6 of the EPF Act and the employees are also in enjoyment of other provident fund benefits which on the whole are not less favourable to the employees than the benefits provided under the Act. As per AS 15, where in terms of any plan the enterprise’s obligation is to provide the agreed benefits to current and former employees and the actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the enterprise, the plan would be a defined benefit plan. Accordingly, provident funds set up by the employers which require interest shortfall to be met by the employer would be in effect defined benefit plans in accordance with the requirements of paragraph 26(b) of AS 15”. Hence, accounting for such benefit by the subsidiary would be advisable.

3. ICAI News:

(Note: Page Nos. given below are from CA Journal for November, 2012)

(i) International Conference to be held at Mumbai:

ICAI is organising an International Conference on 24th and 25th January, 2013 at Mumbai. Theme of this Conference will be “Accounting Profession: Enablers of Economic Growth”. Delegates from Asia and Pacific Region are expected to participate in this Conference (Page 711).

(ii) The effects of changes in Foreign Exchange Rates (AS-11):

Financial Reporting Review Board (FRRB) has re-ported that in some instances, some companies have not followed the requirements of AS-II. These instances are reported on Page 834.

(iii) ICAI Publications:

(a) Compendium of Opinions – Vol XXX (Page 846)

(b) Guidance Note on Accounting and Auditing of Political Parties.

ICAI and its members

1. Code of ethics

The Ethical Standards Board of ICAI has considered some of the ethical issues. These are published in C.A. Journal of January 2012, at pages 1002 and 1004. Some of these issues are as under.

(i) Issue: Can a member publish a change in partnership or change in the address of practice and telephone numbers?

A member can publish a change in partnership or change in the address of practice and telephone numbers. Such announcements should be 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.

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

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

(iii) Issue: Can a concurrent auditor of a bank also undertake the assignment of quarterly review of the same bank?

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

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

A member holding certificate of practice can own and hold agricultural land and continue agricultural activity through hired labour.

(v) Issue: Can a member act both as tax auditor and internal auditor of an entity?

A tax auditor of an entity cannot act as internal auditor of that entity for the same F.Y. Similarly, an internal auditor cannot accept tax audit assignment of the same entity in the same F.Y.

(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 CA 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 are more than one, would constitute professional misconduct.

However, exemption has been given to members practising in Hill Areas, subject to certain conditions.

It may be clarified that a 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 whole-time employee. However, a member can be in charge of two offices if they are located in one and the same accommodation.

2. Chartered Accountants (Amendment) Act, 2010

The above Act has been passed by both Houses of Parliament in December 2011. It amends the CA Act, 1949 and the amendments shall come into force when the Central Government issues the notification to this effect. Some of the important amendments in the CA Act made by this Amendment Act are as under.

(i) A firm of Chartered Accountants has now been defined to include (a) a sole proprietorship concern, (b) a partnership firm defined in the Indian Partnership Act, 1932 and (c) a limited liability partnership (LLP) as defined in the Limited Liability Partnership Act, 2008.

(ii) For the above purpose —

(a) The proprietor of a sole proprietorship concern should be a chartered accountant in practice.

(b) So far as a partnership firm or LLP is concerned it should have at least one partner who is a chartered accountant in practice and other partners may be members of other recognised professions as may be prescribed.

(iii) Similar provisions are made by amendments in the Cost & Works Accountants Act and the Company Secretaries Act. Therefore, if the councils of ICAI, Cost Accountants and Company Secretaries pass requisite regulations, it will be possible for one or more Chartered Accountants in practice to enter into partnership (including LLP) with Cost Accountants and Company Secretaries in practice. Incidentally, it may be mentioned that the name of the ‘Institute of Cost and Works Accountants of India’ has now been changed to ‘Institute of Cost Accountants of India.’

(iv) At present, the number of partners in a firm cannot exceed 20. The Companies Bill, 2011, which is before the Parliament, has removed this limit when professionals form a firm. Therefore, if this Companies Bill is passed, there will be no limit on the number of partners in a professional firm. Similarly, the LLP Act also provides that there is no limit on the number of partners in a LLP.

3. EAC opinion

Facts
Company ‘A’ Limited, a wholly-owned subsidiary of ‘B’ Ltd., is not a company in which public is substantially interested. ‘B’ Ltd. owns 15% shares in ‘C’ Ltd. With a view to acquire central over ‘C’ Ltd., the balance 85% shares of ‘C’ Ltd. were acquired by ‘A’ Ltd. from the other shareholders of ‘C’ Ltd. These shares were purchased in F.Y. 2010-11 at a value which was less than the prescribed value under Rule 11(UA) of the Income-tax Rules. Since the prescribed value was more than the purchase value of shares of ‘C’ Ltd. and the difference was more than Rs.50,000, the excess of the aggregate difference in value was liable to tax under the head ‘Income from Other Sources.’ ‘A’ Ltd. has paid tax on this deemed income determined u/s.52 (2)(viia). In addition to the above, the company has also incurred expenses on account of stamp duty, franking and bank charges in connection with the said acquisition of shares.

According to the company, the payments of income-tax u/s.56(2)(viia) has arisen out of the transaction of acquisition of shares and the company would not have incurred such an expense otherwise. Therefore, the said cost would be directly associated with purchase of such shares. Had the acquisition of these shares not been made, the company would not have incurred such costs.

On the basis of the above, the company sought the opinion of the Expert Advisory Committee (EAC) whether the payments of tax u/s.56(2)(viia) would qualify to be treated as part of the cost of investment in the balance sheet of the company in view of the explanation provided in paragraph 9 and 43 of Ind AS 39 read along with paragraph AG13 of Appendix to Ind AS 39.

Opinion
The Committee noted that although Ind ASs have been placed on the website of the Ministry of Corporate Affairs, these Standards have not yet been notified by the Ministry. Accordingly, till the Ind ASs are notified by the Ministry, the existing notified Accounting Standards would be applicable. Therefore, in the case of the company, the Committee is of the view that the transaction of acquisition of investment in shares would be governed by the existing notified AS-13.

With regard to accounting for the tax levied u/s.56(2)(viia) of the Income-tax Act, the Committee has considered AS-13, which provides that the cost of an investment ‘includes acquisition charges such as brokerage, fees and duties’. Keeping in view the nature of the item of acquisition charges mentioned in AS- 13, the Committee is of the view that the cost of acquisition should include only those direct charges which are incurred ‘on’ acquisition of investment, i.e., the expenses, without the incurrence of which, the transaction could not have taken place, such as, share transfer fees, stamp duty, registration fees, etc. The Committee has noted that tax paid u/s.56(2)(viia) is levied when consideration paid for acquisition of investment is lower than its fair market value for an amount exceeding Rs.50,000 and such lower consideration paid is deemed to be income of the assessee. Thus, this tax is not a tax ‘on’ acquisition of shares, rather it is a tax on ‘deemed income’ under the Income-tax Act. Accordingly, the Committee is of the view that such tax expense is not a cost incurred ‘on’ acquisition of investment, rather it is incurred after the transaction of the acquisition of investment. In other words, it is not a means of acquiring such investments; rather it is a result of such acquisition. Accordingly, such tax cannot be considered as acquisition-related cost and, therefore, cannot be capitalised as cost of investment. The Committee is further of the view that such tax paid should be treated as normal tax and charged off to profit and loss account in the year in which it is incurred.

The Committee, after considering the proposal Ind AS 39, is of the view that only those transaction costs that are directly attributable to the acquisition of investment can be capitalised with the investment. The Committee is of the view that although the tax levied u/s.56(2)(viia) may be considered as an incremental cost of acquisition of investment, it cannot be considered as ‘a directly attributable cost’.
(Please refer pages 1035 to 1037 of CA Journal, January 2012)

4. ICAI News

(Note: Page Nos. given below are from C.A. Journal for January 2012)

(i) General Amnesty Scheme for Members
The Executive Committee of the ICAI Council has, at its recent meeting, considered the question of putting a General Amnesty Scheme in place for members whose names have been removed on account of non-payment of membership fee with a view to facilitating such members restore their names with retrospective effect. The Committee has recommended to the Council that the members whose names stood removed in the past due to non-payment of membership fee be given an opportunity, by way of a General Amnesty Scheme, to restore their names, irrespective of the period of such removal, retrospectively on payment of applicable membership fees for the years during which the names were removed and for the current year i.e., 2011-2012. For this purpose, application should be made together with fee(s) of the intervening years(s), along with Form ‘9’ and the additional (restoration) fee of Rs.1,200.

The Committee has recommended that the above General Amnesty Scheme be kept in force up to 31st March 2012. (Page 993)

(ii) Empanelment of C.A. firms for audit of PSUS for 2012-13

The C & AG has issued the following Circular which is at page 1101.

Applications are invited from the firms of Chartered Accountants who intend to be empanelled with C & AG for appointment as auditors of Government companies/Corporations for the year 2012-2013. The format of application will be available on our website: www.cag.gov.in from 1st January to 15th February 2012. Chartered Accountant firms can apply/update the data showing the status of their firm as on 1st January 2012 and generate online acknowledgement letter for the year. They are also required to submit related documents (to be notified in this office website) to this office before 28th February 2012. Only the Chartered Accountant firms who have generated online acknowledgement letter for the year 2012-2013 and submitted the documents before the due dates will be considered for empanelment.

Any changes in the constitution of the firm oc-curring after the cut-off date of 1st January 2012 should continue to be updated in the website which will be available throughout the year. However, the changes in the firm occurring after 1st January 2012 till the time of preparing the panel that will lead to a reduction in rank of the applicant firm shall only be taken into account for ranking the CA firms.

(iii) New ICAI publications

(a)    Compendium of Auditing Standards — up-dated to 1-10-2011
(b)    Compendium of Guidance Notes on Auditing — updated to 1-10-2011
(c)    Study Report on Accounting on Food, Fertilisers and Oil subsidy (page 1101)
(d)    Compilation of Registration Provisions under VAT Laws of different States (page 995)
(e)    Technical Guide on Internal Audit of Mutual Fund Industry (page 995)
(f)    Guidance Note on Revised Schedule VI of Companies Act.

ICAI News

(i) CA NKP SALVE is no more

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)

EAC opinion

Facts:

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:

The committee after considering definition of the term ‘Depreciation’ as provided in paragraph 3.1 of Accounting Standard (AS) 6, ‘Depreciation Accounting’ noted that depreciation arises due to several factors including efflux of time and wear and tear due to use. Accordingly, depreciation occurs with the passage of time, even if concerned assets is not in use. The Committee noted that Schedule XIV to the Companies Act specifies separate rates of depreciation in respect of single shift, double shift and triple shift.

As regards depreciation to be charged in respect of extra shift working, the Committee, after considering clauses 4 and 6 to Notes to Schedule XIV of the Companies Act, is of the view that physical wear and tear of a depreciable asset, which is operated for more than a shift, is generally higher than the one, which is used on a single-shift basis. Accordingly, Schedule XIV to the Companies Act prescribes higher rates of depreciation for the assets operating for extra shifts. Further, it prescribes methodology to compute ‘extra depreciation’ for the assets operating for extra shifts. The Committee is further of the view that the rates of depreciation specified in respect of single shift have been determined based on two factors — effluxion of time and wear and tear. However, in case of double shift and triple shift, the factor of effluxion of time remains constant. Therefore, rates for extra shifts include only the incremental/extra depreciation due to extra wear and tear. Thus, the Committee is of the view that single shift depreciation rate should be applied for the time period when the asset is held by the company irrespective of the fact whether such asset is in use or not. As regards ‘extra depreciation’ to be computed for items of plant and machinery operating for extra shifts, the incremental depreciation should be determined by applying the differential rate of depreciation, i.e., depreciation rate as specified for the relevant shift less the rate specified for the single shift in the proportion which the company worked for the double/triple shift bears to the number the number of days on which the factory or ‘concern’ actually worked during the year. The formula for arriving at the ‘depreciation’ shall be as under:

Depreciation for single shift working + (Depreciation for double/triple shift working — Depreciation for single shift working) x (Number of days worked double or triple shift/Normal working days during the year).

The Committee further noted that clause 6 of Schedule XIV to the Companies Act requires that for ‘extra depreciation’, normal number of working days would be the number of working days on which the factory or ‘concern’ actually worked during the year. Thus, it is not the working days of individual plant and machinery item, which should be considered for the purpose of computing extra shift depreciation rather it is the working days of the factory or ‘concern’. In this regard, it may be mentioned that various units/departments/mills/factories should be taken as separate concerns. Accordingly, the Committee is of the view that ‘normal number of working days’ should be calculated after deducting shut down period of the factory or ‘concern’.

Code of ethics

The Ethical Standards Board of ICAI has given answers to some of the ethical issues raised by our members. These are published on pages 1634- 1636 of CA Journal for May, 2012. Some of these issues are as under.

(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.

ICAI and its members

1 ITA Tribunal raises concerns about Professional Standards of ICAI Members:

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:

centre

dates

Mumbai & New Delhi

13th to
18th and 20th October, 2014

Bangalore, Chennai & Kolkata

14th to
18th and 20th October, 2014

Hyderabad

15th to
18th and 20th October, 2014

(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)

ICAI and its members

1 Disciplinary cases:

ICAI publication on ‘Disciplinary Cases’ gives decisions by the Disciplinary Committee. Some of these decisions are given below. Names of members are not given for the sake of confidentiality. Page Numbers given below are from the Publication Vol.I – (Part II)

(i) Re. SRK:
If this case the CIT, Mumbai, had written to the Institute that the member had conducted Tax Audit u/s. 44 AB of an assessee for A/Y: 2004-05. In this case, the assessee had claimed Rs. 3.74 crore as interest paid to Bank on Loan. Out of this Rs.3.10 crore was not paid. According to CIT this was not allowable u/s. 43B. This fact was not pointed out by the member and this amounted to gross negligence on the part of the member.

The defence of the member was that section 43B(e) of the Income tax Act was amended w.e.f. 2004 -05 whereby the interest to Bank on loans and advances, if not paid by due date, was not allowed. Prior to this amendment the provision applied to interest on term loan from bank. Moreover, the assessee had brought forward losses of Rs.10 crore and therefore there was no loss to revenue. The member pleaded that it was only due to oversight that he failed to notice this amendment and therefore failed to give effect to it in the Tax Audit Report.

The DC has held that A.Y 2004-05 was the first year wherein the said amendment was made applicable and the member should have been careful in giving effect to it. Further, due to past losses, there was no loss of revenue by this non-disclosure. The D.C. was of the view that there was negligence on the part of the member but there was no mala fide intention on the part of the member. On this basis, the member was held to be “Not Guilty” of any Professional misconduct (P. 144 – 147)

(ii) Re. TRM: In this case, the outgoing auditor of a co-operative Bank had complained that the Member had accepted the audit for the subsequent year without first communicating with him and that the Bank had not paid his fees. The defence of the member was as under.
(a) T he appointment was made through empanelment with Registrar of Co-operative Dept and not by the Bank.
(b) T he communication about the appointment was made by a letter to the previous auditor which was sent through Courier. This letter was not by Regd. Post or Speed Post but there was evidence that it was received by the previous auditor.
(c) A s regards the outstanding fees the member was informed by the Bank that the audit fees fixed by the Registrar were only Rs. 9,000/- but the previous auditor had raised bill of over Rs. 66,000/-. Hence, this was in dispute and therefore not paid by the Bank.

The DC has held as under:

(a) T here was evidence to the effect that the member had sent communication about his appointment to the previous auditor and, therefore, this charge was not proved.
(b) A s regards the Fees it was proved that there was dispute with the Bank. It was also proved that subsequently the undisputed amount of audit fees of Rs. 9,000/- was paid by the Bank to the previous auditor.

On the basis of the above finding, the D.C. held that the member was not guilty of professional misconduct (P 167 – 172).

2 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.

(i) Disclosure about Prior Period Items: In some published Annual Reports disclosure about prior period items is made as under.

(a) Prior period expenses and income are adjusted in respective heads of expenses and income in the Profit & Loss A/c.
(b) P rior period expenses are shown under the head of selling and administrative expenses. (c) P rior period adjustment (net) is shown in the P & L A/c.
(d) P rior period expenses are shown under the head of other expenses.
(e) D epreciation charged during the year includes an amount of depreciation pertaining to previous year.

Observation of FRRB:

The disclosures are contrary to Para 15 of AS.5. Under AS-5, the nature of prior period items is required to be disclosed in the P & L in the schedules or in the Notes. Clubbing the prior period adjustments in their respective heads does not enable the reader to understand the effect of such adjustments on the current profit or loss which is against the requirements of AS-5.

(ii) Disclosure of Depreciation Policy:
Annual Report of one of the Companies stated that “Depreciation Rates on some of the Fixed Assets have been revised so as to keep them as per the requirements of Schedule XIV of the Companies Act”.

Observation of FRRB:

When Depreciation Rates are revised during the year, it will lead to change in Accounting Estimate as provided in Para 27 of AS-5. This may result in provision of depreciation which may be of higher or lower amount then that of provision at pre-revised rates. This will have material impact on the finance statements. In this particular case, the company has not complied with Para 27 of AS-5. The Company should have disclosed the aggregate effect of the revision in depreciation rates on the Profit/Loss for the year.

3 Accounting Treatment of Expenditure incurred on Stamp Duty and Registration Fees for Increase in Authorised Capital:

(Page 249 – 253)

A company was incorporated under the Companies Act, 1956 as a private Limited company. The company is registered as a non-banking financial company (NBFC) (non deposit accepting) as defined u/s. 45-1A of the Reserve Bank of India Act, 1934 (RBI). The company is primarily engaged in the business of lending for purchase of equipments.

The Company’s Authorised Share Capital as on 31st March, 2013 was Rs.7,00,00,000/- The Company received share application money of Rs. 55,62,55,000/-. To be able to allot further equity shares, the shareholders of the company, have approved increase in authorised share capital to Rs. 75,00,00,000/-. The company has incurred an expenditure of Rs. 47,60,000 /-(Rs. 34,00,000 towards stamp duty and Rs.13,60,000 towards registration fees paid to the Registrar of Companies) for the said increase in authorised share capital.

Post increase in authorised capital, the Board of Directors of the company has passed a resolution for allotment of 5,56,25,500 equity shares of the company of Rs. 10/- each at par amounting to Rs. 55,62,55,000/-.

The issue relates to accounting treatment of the expenditure of Rs. 47,60,000/- incurred by the company for increase in authorised capital.

Query:
On the basis of the above, opinion of the EAC is sought by the company, whether the company can treat the whole of the expenditure incurred on increase in authorised capital as ‘share issue expenses’?

EAC Opinion:
The Committee noted from the Facts of the Case that the company has received share application money in excess of the authorised share capital and subsequently increased its authorised share capital and made allotment of shares. The Committee notes that the query raised is in relation to expenses (stamp duty and registration fee) incurred for increase in authorised share capital of the company.

After considering paragraph 5 of accounting standard (AS) 26 ‘intangible assets’ and Guidance note on terms used in financial statements, the Committee is of the view that increase in authorised share capital is an independent process which does not necessarily lead to issue of shares. The need to increase the authorised capital and to incur expenses for increasing the same would not have arisen had the additional allotment of shares was within the limits of existing authorised capital. Accordingly, the Committee is of the view that the expenses incurred on increase in authorised share capital are distinct and separate from the expenses incurred on share issue. additionally, the Committee is of the view that accounting depends on the nature of expense and the fact that the share application money was received before increase in authorised share capital will not change the nature of expense. further, increase in authorised share capital does not represent issue of additional share capital and only sets a limit for the paid up capital of a company at any given point of time. Accordingly, the Committee is of the view that the expenses incurred on increasing the authorised share capital cannot be termed as share issue expenses

Further considering the paragraph 6.2 of as 26, the Committee notes that if an expenditure does not result into acquisition of an asset, it should be recognised as an expense as and when incurred. the Committee also notes that the amount spent towards increase in authorised share capital does not give rise to any resource controlled by the enterprise. in fact, such expenses are only permitting the company to enhance the limit for the paid up capital of the company which does not ensure any flow of funds to the company. Accordingly, it does not meet the definition of an asset. Thus, the amount aggregating to rs. 47,60,000/- incurred towards stamp duty and fees paid to the registrar of Companies should be recognised as expense in the statement of profit and loss as per the requirements of paragraph 56 of as26.

[Pl. Refer page nos. 249 to 253 of C. A. Journal – August,2014]

4 ICAI News
Note: (page numbers given below are from C.A. journal of august, 2014)

(i) Final C.A Examination (May 2014) results (TOI 9.8.2014)
final C.A., may 2014, examination results were declared on 8th august 2014. a comparative chart of pass percentage for last 3 examinations is as under.

In may, 2014, examination out of 42,533 students who appeared for the examination in both Groups only 3100 passed. Names of first three Rank Holders are as under:

Group

may, 2014

november,
2013

may, 2013

Both Groups

7.29

3.11

10.03

Group I

13.50

5.67

13.79

Group II

10.66

7.35

18.65

First : Shri sanjay nawandhar (jaipur)
Second : Shri Kunal jethani (jodhpur)
Third : Ms. harsha Bhatted (pune)

Our Congratulations and Best Wishes to each of the above candidates.

(ii) New Publication of ICAI(278)
Technical guide on internal audit of it software industry.

(iii) Ind AS Implementation (P.147)
The president in his presidential message has stated that the finance minister has proposed in paragraph 128 of the Budget speech for the year 2014-15 that there is urgent need to converge current indian accounting standards with international financial reporting standards (IFRS) and that the new indian accounting standards (ind as) converged with ifrs shall be adopted by the Indian Companies from the financial year 2015- 16 voluntarily and from the financial year 2016-17 on mandatory basis.

ICAI and its members

1. CPE Credit

Under the existing regulation of the ICAI members in practice have to obtain CPE credit for 90 hours in a block of three years (including 60 Hours of structured CPE credit). Members not in practice have to obtain CPE credit for 45 hours (unstructured CPE credit). For structured CPE Credit members have to attend seminars/conferences/ workshops organised by the ICAI, Regional councils, Branches of the ICAI, CPE study circles etc. Attendance at Courses Organised by other reputed C.A. Societies, C.A. Associations, Chambers etc., are not recognised for structured CPE Hours. One, Shri Arun Anandagiri, has filed an application before Competition Commission of India alleging abuse of dominant position by ICAI u/s. 4 of the competition Act, 2002, by imposing unfair and discriminatory conditions with respect to its CPE scheme.

The Commission has passed an order dated 28-02-2014 stating that there seems to be force in the allegations of the applicant that the restriction put by the ICAI in not allowing any other organisation to conduct the CPE seminars for CPE credits, creates an entry barrier for the other players in the relevant market. The commission has also noted that the ICAI is not conducting the CPE seminars and conferences on not-for-profit basis as in the accounts of ICAI for F.Y. 2012 – 13 the gross revenue from such activity was Rs. 45 crore.(i.e., 8% of its total revenue).

Accordingly, the Commission has directed the Director General (D.G.) to investigate the matter further and report to the Commission within 60 days. After receipt of the report from the D.G. the Commission will pass the final order.

2. Disciplinary Cases:

The Disciplinary Committee (DC) of ICAI has decided some cases about professional or other misconduct of members. These are reported in the publication “Disciplinary Cases VOI – I.” Page Nos. given below are from this book. Names of members are not given in order to maintain confidentiality.

(i). Case of SCS:

In this case, the complainant had alleged that (a) the member submitted wrong Income-tax Return prepared by him to the tax authorities without approval of the Company, (b) he charged fees for preparing financial reports and tax return and also charged for filing revised return of income, (c) in spite of repeated requests, the member did not give copies of the tax returns to the company, (d) he was paid Rs. 25,000/- for formation of a new company. He did not do anything in this respect and was absconding, (e) he was in possession of the Books, Vouchers, PAN Cards and Digital Signatures of Directors, copies of Tax Returns, Company’s Seal etc., and was not returning these Books, Vouchers, documents etc.

The DC noted that both the complainant and the Member did not appear at the time of hearing. They did not cooperate in the inquiry and did not furnish any statements apart from the complaint and the annexures. Further, the name of the member was removed from the Register of Members for non-payment of Fees to the ICAI. Yet, the member used to practice in two different firm names without being a partner in the firm. From the facts stated in the complaint and annexures, the committee came to the conclusion that the member was guilty of professional and other misconduct under Clause (2) of Part IV of First Schedule, CIause (7) of Part I and CIause (1) of part II of the Second Schedule to the C.A. Act. On this basis, the DC directed for removal of the name of the member from the Register of Members for a period of five years. (P. 135 to 142 – Part I)

(ii) Case of MJD:

In this case, the complainant had alleged that the member was maintaining accounts of the Firm and also acted as its Tax Auditor. Further, the member was also in active business association with the firm and the company which had taken development rights from the Firm. He was also in possession of the accounting records of the complainant but was denying the same.He refused to audit the accounts of the firm and represent the firm in subsequent years which caused huge financial loss to the Firm.

The DC observed that the member was engaged in carrying out the day-to-day business affairs of the company, being a director of the company while he was holding COP without obtaining permission of the ICAI. Further, he was maintaining accounts of the firm and acting as Tax Auditor of the Firm. It was pointed out that as per the Guidance Note on Independence of Auditors, “members are not permitted to write the books of their auditee clients.” After hearing the parties and examining the evidence on record, the DC held that the member was guilty of professional misconduct under Clause (11) of Part I of the First schedule and Clause (4) of Part I of the second schedule to the C.A. Act.

The DC noted that there were two complaints filed against the member. In the first complaint the Board of Discipline had already held the member guilty under Clause (11) of Part 1 of First schedule and directed to remove the name of the member for seven days. In view of this, in the present complaint the DC decided to “Reprimand” the member (P. 1-7 of Part I).

(iii) Case of Ms. BKD:

In this case, the member had audited accounts of a Cooperative Housing Society. In the complaint by some members of the society it was alleged that (a) the member had secured the audit through her father who was paid Accountant/Consultant of the society and (b) the member had done other illegal audits of other Housing Societies with the help of her father.

During the hearing before the DC, the member pleaded guilty and requested the DC to take a lenient view. The member submitted that she had conducted the internal audit on verbal communication from the Management Committee. However, the audit report was given in the same format as the statutory audit report. Further, she had not conducted audits of any other Housing Society as she was not on the panel of Auditors for co-operative societies. The Managing Committee had signed the annual accounts of the society and no discrepancy was pointed out by the Complainant.

The DC noted that there were certain disputes amongst the members of the society which led to the filing of this complaint. There was no resolution of the Managing Committee for the appointment of the member as statutory or internal auditor and the member had not verified this fact. On verification of the financial statements, it was noticed that they appeared to have been drawn up for statutory purposes and not for Internal Audit. However, the DC noted that there were no irregularities or deficiencies in the Financial Statements and the member had carried out her duties in a diligent manner. The present complaint was due to disputes between the members and not due to any negligence in discharging audit function by the member. On this basis, the DC held that the member was not guilty of any professional misconduct. (P. 139-143 of Part II )

3. Some Ethical Issues:

The Ethical Standards Board has given answers to some Ethical Issues on Pages 1762 – 1764 of C.A Journal for June, 2014. Some of these issues are as under:

(i) What are the measures available to a Professional Accountant in case a conflict of interest arises?

A professional accountant in public practice should take reasonable steps to identify circumstances that could pose a conflict of interest. Such circumstances may give rise to threats to compliance with the fundamental principles.

A professional Accountant should evaluate the significance of any threats. Depending upon the circumstances giving rise to the conflict, he should ordinarily notify the client/all known relevant parties.

The additional safeguards would be the use of separate engagement teams, clear guidelines for members of the engagement team on issues of security and confidentiality. Regular review of the application of safeguards by a senior individual not involved with relevant client engagements should also be considered.

(ii) What is independence?
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, allow- ing 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 that firm’s or a member of the assurance team’s integrity, objectivity or professional skepticism had been compromised.

(iii) What is the Conceptual Framework to Independence?

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 determine the appropriate safeguards to eliminate threats to independence or to reduce them to an acceptable level depending on the characteristic of the individual assurance engagement.

4. EAC Opinion:

Treatment of Commission Cost Paid to Agent in Relation to Projects

FACTS:
A company is involved in the business of designing, engineering and erection of ethanol, brewery, water and wastewater treatment plants. The company caters to both domestic and international markets. The revenue recognition of the company is governed by Accounting Standard (AS) -7, ‘Construction Contracts’ for the above mentioned line of business.

The company executes projects in international and do- mestic markets for the above mentioned business. In certain cases, the company appoints agents to undertake certain activities. The services rendered by the agent form an integral part of the project right from inception of project till the timely execution and completion of the project. The agent provides various services in the nature of procurement support, vendor short listing, and technical services etc., which are an integral part in the execution work of the project and as such. The costs towards sales commission are specific for that contract and essential for smooth execution of the project. These costs would be incurred only where the project activity is carried out for that particular contract.These are specificially identified for each project and considered in the total estimated cost of the project.

The company further stated that it presently pays compensation to these agents for the services rendered in the form of ‘sales commission’ by entering into individual agreements with them. The sales commission is decided as a percentage of contract value and the same is accrued in the books of account in proportion to the contract revenue of the respective project.

The company has also informed the committee that although the commission costs are not explicitly charged to the customer as a separate cost, these form part of the total project cost and are considered while deciding the order value. As such they are not specifically reimbursable from the customer on one to one basis.

The commission paid to the agent is treated as direct cost of the project and included in the total estimated cost of the project as sales commission cost.

QUERY:
The Company has sought the opinion of the EAC on thefollowing issues:
(i) Whether the treatment adopted by the company, of including the commission cost as part of project cost, as explained above is correct; (ii) If the treatment adopted is correct, whether the cost would be classified as direct cost of the project or cost allocable to the project; (iii) If the treatment adopted is not correct, under what head these costs can be classified under indirect expenses; and (iv) Whether the treatment adopted by the company to calculate percentage of completion including the sales commission cost comply with the revenue recognition principle as envisaged under AS7?

EAC OPINION :
The Committee after considering paragraphs 15, 19 and 20 of Accounting Standard (AS) 7, ‘Construction Contracts,’ notes that contract costs include the costs directly related to a specific contract as well as the costs that are attributable to contract activity in general and can be al- located to the specific contract.

The Committee notes from the Facts of the Case that so far as the activities of the agent related to execution of the contract activity, such as procurement support, project coordination and other technical services are concerned, the Committee is of the view that these activities are directly related to the construction contract and therefore, costs pertaining to these activities should be treated as costs that relate directly to the specific contract. Similarly, activities of the agent related to finding the prospective customer and obtaining the contract, etc can also be treated as directly related to the contract as in the case of the Company, the costs pertaining to these activities are payable only on obtaining the contract.

The Committee notes from the Facts of the Case that the agent, in the case of the Company, not only provides services in relation to securing of the contact, procurement support and other technical services relating to the execution of the project, but also facilitates and arrange ad- vance payments from the customer and ensures timely collections from them. The Committee is of the view that activities relating to the facilitation and arrangement of advance payments and final collections from the customer and other similar activities are of the nature of administration costs, which cannot be considered as attributable to construction activity and accordingly, cost of these activities should not be treated as the cost directly related or that attributable to a construction contract Therefore, the Committee is of the view that if the commission cost paid to the agents is a composite commission, the company should assess whether the latter activities and the cost in respect thereof are material and if it is so, attempt should be made to estimate the cost pertaining to these activities considering the factors such as, the cost that would have been incurred had the agent performed only these activities, etc. Accordingly, the cost incurred on selling and administration activities should not be included in contract cost.

As regards to including the commission cost for determining the stage of completion, the Committee notes from paragraph 30 of AS 7, that only those contract costs that reflect work performed should be included in costs incurred upto the reporting date. However, as per the Facts of the Case, related commission is accrued in proportion to contract revenue. In other words, such costs are not being recognised considering the performance of related services rather than the same is being recognised on the basis of contract revenue. Accordingly, the Committee is the view that inclusion of commission on this basis is not correct; rather, it should be recognised considering the performance of related service provided the commission so determined is ‘contract cost’.

[Page Nos. 1792 to 1795 of C. A. Journal – June, 2014]

5. ICAI News:

Following announcement is made by ICAI at P.1873 of C.A. Journal for June, 2014.

It has come to the knowledge of some members that certain entities, while inviting tenders for services of chartered accountants for the assignment of statutory audit, are mentioning accounting and book keeping related works in the scope of works required to done by the auditor.

Members are hereby advised not to undertake such assignment since it is violative of the provisions of ‘Code of Ethics’ and ‘Guidance Note on Independence of Auditors’ for auditor of an entity to do book keeping work of the entity. The said prohibition in the case of Companies is further also mentioned in section 144 of the Companies Act, 2013.

ICAI and its members

1. Some Ethical Issues

The Ethical
Standards Board of ICAI has given answers to some Ethical Issues on
pages Page 610 to 612 of C A. Journal for Novemberg 2014. Some of these
issues are as under:

(i) Issue:

Whether sponsorship or prizes be instituted in the name of a Chartered Accountant or a firm of Chartered Accountants?

An
individual Chartered Accountant or firm of Chartered Accountants can
institute or sponsor prizes, provided that the designation ‘Chartered
Accountant’ is not appended to the prize and the Clause (6) of Part I of
the First Schedule to the C. A. Act, regarding advertisement and
publicity is complied with.

(ii) 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 I of the
First Schedule to the C. A. 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.

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

The
first schedule Part 1 Clause (6) (J) of C.A. 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 is his duty to ask the client that
he should come through the member dealing with his original work.

(iv) Issue

Can a Chartered Accountant in practice also practice as an Advocate?

Under
the first schedule Part I Clause(7) of the C.A. Act, the council has
prescribed that a practicing C.A. who is otherwise eligible may practice
as an Advocate subject to permission of the Bar Council. In such a
case, he should not use the designation ‘Chartered Accountant’ in
respect of the matters involving the practice as an Advocate. In respect
of other matters, he can use the designation ‘Chartered Accountant’ but
he should not use the designation ‘Chartered Accountant’ and ‘Advocate’
simultaneously.

2. EAC Opinion

Disclosure of the Revenue as per AS 9

Facts:
A
company is primarily engaged in the business of owning and running
hotels and resorts. The company receives bookings for the hotel and
resort rooms and related facilities from individuals, corporates and
travel agents.

The company has a tariff card (rate list) for all
the room types which is inclusive of all taxes. Ideally, when a
customer approaches the company, he is offered the tariff rate. However,
the company has been using various marketing strategies to attract
guests. As a strategy, the company offers discounts to the guest
discretionally, based on various factors. The company has observed that
when the guest is given a discount, he feels happy about it and becomes a
loyal customers of the resort. This strategy has given to the company
an edge over its competitors and thereby helped the company to increase
its turnover year on year.

The Company has further stated that it is currently recognising revenue at tariff rate and is treating discount as an expense.

Query:
The
Company has requested the EAC to clarify how disclosure of the revenue
would be in compliance with the disclosure required in AS9 (Revenue
Recognition).

Opinion:
The Committee notes that the
basic issue raised by the Company is the accounting treatment of the
discount(s) allowed by the company and its presentation in the statement
of Profit and loss as per AS 9.

After considering the
definitions of ‘cash discount’ and ‘trade discount’ as given in the
Guidance Note on Terms used in Financial Statement issued by ICAI, the
committee is of the view that trade discount is not encompassed within
the definition of revenue since it represents a reduction of cost and
accordingly, the revenue is determined and recognised after deducting
the trade discount. Further, the Committee after considering the
definition of ‘Revenue’ given in Accounting Standard (AS 9) ‘Revenue
Recognition’ is of the view that the revenue is the charge made to
customers which in case of trade discount is the amount of net of
discount. Accordingly, the Committee is of the view that the
presentation by the company to present the revenue on gross basis and
then to present the trade discount as expense is not correct and is not
in accordance with the requirements of AS 9.

[Pl. Refer page nos. 643 to 645 of C. A. Journal – November, 2014]

3. Financial Reporting Review Board (FRRB)

ICAI
has published a “Study on Compliance of Financial Reporting
Requirements”. Some of the observations in this publication relating to
compliance with Accounting Standard (AS) 5 are given below for the
information of Members.

(i) Treatment of Foreign Exchange Loss / Gain (P.43)

It
was noticed that one of the Notes to Accounts given in the Financial
Statements stated that the company has opted to capitalise the Foreign
Exchange Loss/Gain on reporting of Long Term Foreign Currency monetary
items used for depreciable assets retrospectively w.e.f. 01-07-2007 in
view of GSR 225(E) dated 31-03-2009 issued by the Central Government as
regards AS-11, Consequently Rs.xxx lakh (including Rs.xxx lakh relating
to previous years) has been added to the cost of depreciable assets.

Observation of FRRB
Referring
to Para 32 of AS.5 (Net Profit and Loss for the period, prior period
Items and changes in Accounting Policies) it was evident that there are
two distinct aspects for dealing with the situation. The first requires
disclosure of change in the accounting policy which has a material
effect and the second aspect requires the disclosure of the impact of
such changes on the financial statements. In the case of company the
above note indicated that there was a change in an accounting policy but
the impact of such change was only partly disclosed. In this case such a
change had two fold impact due to write back of exchange difference of
earlier years viz., the aggregate impact due to the write back and
additional depreciation thereon on the profit or loss for the year. The
above note only discloses aggregate impact but does not disclose the
impact on the profit or loss of the current year. To this extent
requirement of AS-5 has not been complied with.

(ii) Disclosure of Extra – Ordinary Items (P.45)

In one of the Financial Statements, there is the following note in the Notes to Accounts:-

“FCCB
were considered as non-monetary liability during the previous period,
but keeping in view the provisions of AS-11 and the principle of
prudence as enunciated in AS-1, the foreign exchange loss of Rs.xxx
million arising out of revaluation in respect of outstanding FCCB of USD
xxx million as on 31.03.2008 has been recognized and charged to Profit
and Loss Account of the year as an extra ordinary item”.

Observation of FRRB
Referring
to Para 4.1 and 4.2 of AS-5, it was observed that the foreign exchange
gain or loss arising on outstanding balance of FCCB is an ordinary
activity since FCCB is taken by the company as a part of its business
only. Therefore, classification of the gain or loss on such foreign
exchange fluctuations as extra – ordinary item amounts to non–compliance
with the requirements of AS-5

(iii) Adjustment of earlier year’s provision against general Reserve (P. 46)

In the case of a company excess depreciation charged in earlier years and Leave Encashment liability of earlier years was adjusted against credit balance of General Reserve.

Observation of FRRB
Referring to Para 15 of AS-5, FRRB has observed that the Prior Period items should have been accounted in the Profit and Loss Account instead of adjusting them against the general reserve. Further, it was also noted that no disclosure has been made with regard to such adjustments either in the related schedules or in the notes to the accounts explaining the reasons for such adjustment against the General Reserve.

4. ICAI news
(Note: Page Nos. given below are from C.A. Journal of November 2014)

(i) National Advisory Committee on Accounting Standards (NACAS)

This Committee has been recently reconstituted by the Government under the Chairmanship of C.A. Amarjit Chopra (Former President of ICAI). This committee will advise the Government on Accounting Standards as con- verged with International Financial Reporting Standards which are to be adopted in India from next year (2015-16) on a voluntary basis by companies in India. These stan- dards will become mandatory in 2016-17 (P. 598)

(ii) ICAI initiative in E- learning

The following 10 hi-tech initiatives have been launched.

(a) ICAI Mobile App – Information about all announce- ments, photo gallery, videos, news and other infor- mation about ICAI.

(b) Flexi Working Portal for Women Members- To help women members to find suitable opportunities Part-time/Flexi-Hours Jobs and Jobs with work- from-Home option.
(c) ICAI Knowledge Portal – Offers access of latest publications, announcements, articles, journals etc.

(d) ICAI Video Podcast – Consists of audio, video, PDF, and ePub files that can be subscribed to and downloaded or streamed on line.

(e) ICAI cloud campus – For students in India and abroad who can get education and training at their doorsteps.

(f) ICAI Publications Online – ICAI Publications, ICAI stationery items and ICAI E-learning CDs can be delivered at your home.

(g) ICAI E-learning – This is available to members, students and non-members. It is a self-paced, in- teractive and captivating learning experience.

(h) ICAI Digital Library – This is a repository of various digital Publications, E-books, Journals etc.

(i) ICAI Embraces Social Media – You can follow ICAI on Facebook, Twitter, You Tube and Google to catch up on the latest news, important announcements, press releases and updates.

(j) ICAI TV – you can hear the President’s latest speech, lectures by professionals and important announcements through DTH Service (P. 640-641)

(iii) Get C.A. Journal at your Residence

Members can apply to Editorial Board to get C.A. Journal at Residential Address (P. 652)

(iv) ICAI News Publications.

(a) Handbook of Auditing Pronouncements Compendium of Engagement and Quality Control Standards (As on 1st October,2014) Volume 1.A

(b) Compendium of Statements on Auditing (VoL 1.B)

ICAI and its members

1 Disciplinary Cases

(i) ICAI vs. Ved Prakash Verma (2014) 48 Taxmann. com245 (Delhi)

In this case, the member (CA) was an auditor of a Company. He was in possession of the records of the Company. The Disciplinary Committee (DC) of ICAI found the member guilty of professional misconduct on charges of filing of Bogus Forms 2,32 etc., with ROC appointing certain persons as Directors of the Company. Further, it was found that he was taking undue interest in the company’s matters after he resigned as its Auditor. The Council accepted the report of the DC and referred the matter to the Delhi High Court with a recommendation that the name of the Member be removed for a period of six months.

On appeal, the Delhi High Court has held that the DC and the Council of ICAI was justified in holding the member guilty of professional misconduct. The Court also held that such findings by members of the DC and the Council had to be given weightage, as they are experts with regard to the matters pertaining to CA Profession and they knew the intricacies of the professional matters due to their knowledge and personal experience. Hence, the High Court held that the name of the member be removed from the membership of ICAI for a period of six months.

(ii) SATYAM CASE:

On p. 451 of C.A. Journal for October, 2014, the President of ICAI has stated that soon after the SATYAM SCAM was exposed, disciplinary action was initiated against the Statutory Auditors, CFO and Head of Internal Audit Department of the Company. The Disciplinary Committee (DC) found the CA Members guilty of professional misconduct and awarded maximum punishment of removal of their names from the Register of Members of ICAI permanently and also imposed a fine of Rs. 5 lakh on each of them. The Appellate Authority has decided all cases, except one, and has upheld the decision of the DC of ICAI.

Considering the importance of this case and other similar cases, the Council of the ICAI should publish the orders of the DC and the Appellate Authority in the C.A. Journal for the information of our Members. By such publication, the Members will become aware of the facts of such cases and the reasoning adopted by the DC to award punishment. This will also ensure that our members become cautious while performing their professional activities and do not make similar mistakes in the future.

(iii) Case of Shri SB.

(Reported in Disciplinary cases Vol.I Part II published by ICAI – Page 239 – 242).

In this case, the Member was the owner of a flat which he agreed to sell to the Varanasi Branch of the ICAI. He collected Rs. 5,75,000/- from the said Branch and agreed to get the flat transferred to the name of the Branch. There was a delay of more than 10 years in getting the transfer of the flat to the Branch. However, during this period, the Branch was in possession of the flat and carried on its activities from there without payment of any charges. In the Disciplinary proceedings, the DC noted as under:

(a) The member had explained the difficulties in registration of the flat in the name of the Branch.

(b) I n the meantime, the member had entered into an agreement with the Council of the ICAI that in view of the difficulty in getting the registration in the name of the Branch, the member should take possession of the flat and pay Rs. 11 lakh (Rs. 5,75,000/- advance plus interest) to the ICAI.

In view of the above, the DC was of the opinion that since the member had paid the above amount with interest to ICAI there was no mala fide intention on the part of the member. Therefore, the DC held that the member was not guilty of professional or other misconduct.

2 Some Ethical Issues
The Ethical Standards Board of ICAI has given some answers to some Ethical Issues on Pages 462 – 464 of CA Journal for October, 2014. Some of these issues are as under:

(i) Issue No.1: A Chartered Accountants firm issued circulars to non-clients that a Chartered Accountant who was the former partner in-charge of Taxation of one of the largest accounting firms of the world had joined them as partner. Can they do it?

Response: Clause (6) of Part 1 of the First Schedule to the C.A. Act prohibits solicitation of clients or performing work either directly or indirectly by circular, advertisement, personal communication or interview or by any “other means”. The issuance of circular to persons who are not clients but may require services of a chartered accountant would be tantamount to advertisement, since it is solicitation of professional work by making roving enquiries. As per Clause (7) of Part I of the First Schedule, the usage of the words “one of the largest accounting firms of the world” and the specification of specialisation in “taxation” would also amount to advertisement and, thus, constitute professional misconduct.

(ii) Issue No.2: Whether the word “Chartered Accountants” and name of city after the name of the members of the Institute be mentioned in the articles contributed by such members and published in the Institute’s Journal?

Response: There is no restriction in the Code of Ethics for mentioning the word “Chartered Accountant” and also the name of the city in an article contributed by a member in the Institute’s Journal as well as in newspapers and other periodicals.

(iii) Issue No.3: Whether the information contained in the website of the Chartered Accountants and /or Chartered Accountants’ firms can be circulated on their own or through e-mail or by any other mode or technique?

Response: Sub-Para (3) & (4) of Para (m) under Clause (6) of Part 1 of the First Schedule to the C.A. Act, as appearing in the Code of Ethics, 2009 prescribes that the Chartered Accountants and/or Chartered Accountants’ firms should ensure that none of the information contained in the website be circulated on their own or through e-mail or by any other mode or technique except on a specific “pull” request. The Chartered Accountants and/or Chartered Accountants’ firm would ensure that their websites are run on a “pull” model and not a “push” model of the technology, to ensure that any person who wishes to locate the Chartered Accountants or Chartered Accountants’ firms would only have access to the information and the information should be provided only on the basis of specific “pull” request.

3 Financial Reporting Review Board (FRRB)
ICAI has published a “Study on Compliance of Financial Reporting Requirements”. Some of the observations from this publication relating to “Inventories” are given below for information of Members.

(i) Treatment of MODVAT Credit Receivable on Inputs (p. 18)

It was noticed that in Financial statement, while showing the item of Inventories, it has been stated that the Cost of Raw Materials includes amount of MODVAT as per past practice consistently followed.

Observation of FRRB
As per Para 34 of the Guidance Note on Accounting Treatment for Excise Duty, the Inventory of inputs should be valued at net of input duty. In other words, specified duty paid on inputs will not form part of the cost of inventories. The debit balance of MODVAT/CENVAT Credit Receivable (inputs) Account should be shown as an asset under the head “Advances”. Therefore, including MODVAT Credit in the Cost of Inventories is not in accordance with the ICAI Guidance Note.

(ii) Treatment of Excise Duty in Inventory valuation (p. 18 – 19)

In the Annual Reports of some companies, certain noncompliances were observed with respect to treatment of Excise Duty in Inventory valuation as under

In respect of stocks lying in factory, in respect of which State Excise Duty is not determinable as the rates vary depending on places from where dis-patches are made, the excise duty is accounted on clearance of such goods. This method of accounting has no impact on results of the year.

Excise Duty has been accounted on the basis of those goods which are cleared on payment of Excise Duty.

The Company has not provided for Excise Duty on closing stock of Finished Goods and accordingly, the said amount has not been included in the valuation of Finished Goods.

No provision is made for estimated liability on unsold finished goods lying in the factory premises on the reporting date.

Observation of FRRB

Referring to Para 7 of AS-2 (Valuation of Inventories) and Para 18 of the Guidance Note on Accounting Treatment for Excise Duty FRRB has observed as under:

The liability for excise duty arises when the goods are manufactured. Hence, it is necessary to create a provision for liability of unpaid excise duty on stock lying in factory or bonded warehouse.

Therefore, liability for Excise Duty should be provided when the goods are manufactured rather than when the same is paid or at the time of clearance of goods from the factory/bonded ware house.

For determining cost of finished goods in stock on reporting date, the amount of Unpaid Excise Duty should be included in the valuation of such goods.

Therefore, in cases of companies whose Annual Reports were reviewed as stated above, the accounting policies followed for valuation of invento-ries of finished goods were not as per AS-2 as well as the above Guidance Note.

4. EAC Opinion:

Accounting Treatment of Raw materials sent to Manu-facturer by the Company for getting Finished Product

Facts

A Government Company is engaged in the business of transmission of power from the generating units to different State Electricity Boards (SEBs) through its transmission network. The company owns and operates more than 90% of India’s inter-state power transmission system (ISTS). It operates a network of 96,229 circuit kilometers of interstate transmission line, 158 EHV AC and HVDC sub stations. The company intends to continue rapidly increasing its capacity to maintain and grow its leadership position and adding more transmission lines and substations. For the construction of transmission lines, one of the ma-jor material is the conductor. The company is not manu-facturing the conductor. It is being purchased from the various manufacturers in India. Aluminium is the main raw material to manufacture the conductor.

The Company purchases aluminium from an aluminium manufacturer. The aluminium is being supplied directly to the manufacturer of conductor on endorsement in favour of manufacturer by the company. The company also raises the invoice for sale to the conductor manufacturer. The company does not collect any payment from the manufacturer of conductor at this stage against the aluminium supplied and shows it as trade receivable in its books.

The company has stated that the manufacturer, after processing aluminium along with some other raw materials and consumables (purchased by manufacturer at its own cost) like steel, wire, grease etc., manufactures the conductor and supplies it to the company and raises the invoice with full value of conductor as per the contract entered with the company. The company pays the invoice amount after deducting the cost of aluminium already supplied to the manufacturer for the conductor.

Query:

On the basis of the above, the opinion of the EAC is sought by the company on the question as to whether procurement of aluminium from the supplier be accounted for as ‘purchase of goods’ and aluminium given to the manufacturer may be accounted for as ‘sale of goods’ in the statement of profit and loss, or procurement of aluminium may be accounted for as input raw material as ‘construction stores’ in the balance sheet. Additional cost charged by the manufacturer for conversion of aluminium into conductor may be included under ‘construction stores’ as and when charged or simply as contract cost as and when incurred.

Opinion:

The Committee notes that the basic issue raised by the querist is whether the supply of raw material (viz. aluminium rod) by the company to the manufacturer for manu-facturing conductors to be supplied back to the company should be regarded as sale by the company. In other words, whether the supply of raw material to the manufacturer can be considered as an independent transaction from the transaction of purchase of the conductors from the manufacturer, given the fact that such conductors would be manufactured only by using the raw material supplied by the company.

The Committee noted that in the case of the Company, the aluminium rods are procured by the company and supplied to the manufacturer of conductor for conversion into finished product, i.e., the conductor.

The Committee after considering substance over form is of the opinion that transactions and events are account-ed for and presented in accordance with their substance i.e. the economic reality of events and transactions and not merely in accordance with their legal from. In other words, it is the ‘economic reality’ that is important in ac-counting and not only the ‘legal reality’.

From the Facts of the Case, the Committee notes that al-though the legal form of the transaction is that the company is raising invoice on the manufacturer has also taken an insurance policy in its name for the goods supplied to it, the substance of the transaction is that the company still retains effective control on the aluminium rods transferred to the manufacturer and significant risks and rewards relating to ownership of raw material (aluminium) are not transferred to the manufacturer.

Therefore, in view of the Committee, there is no sale to the manufacturer. In fact, the company pays to the manufacturer only for conversion of aluminum rod into con-ductor. Accordingly, the Committee is of the view that no revenue from sales should be recognised on dispatch of raw materials to the manufacturer. Rather, the company should treat them as its own inventory and should ac-count for it accordingly. The company should also make adequate disclosures so as to clearly disclose that such inventory is lying in the premises of the manufacturer for finished product, conductor.

[Pl. Refer page nos. 492 to 498 of C. A. Journal – October, 2014]

5. ICAI News

(Note: Page Nos. given below are from CA Journal for October, 2014)

C.A. Regulations

Draft Notification dated 10.09.2014 published on P. 567 – 568 proposes to amend CA Regulations 28E, 39, 39A and 48. The same will come into force on the date to be notified hereafter.

CA Intermediate (IPC) MAY/JUNE 2014 Examina-tion Results (p. 573)

Our Greetings and best wishes to all the above three and other candidates who have cleared the IPC Examination.

ICAI and its Members

C&AG Report about deficiencies in Tax Audit Reports

In its Report No. 32 of 2014 presented to the Parliament by the C & AG, it is stated that there was a short levy of Income tax of Rs. 2,813.11 crore in 367 Cases in the financial years 2010 – 11 to 2012 – 13, as a result of wrong Tax Audit Reports issued by members of ICAI. The C & AG has classified the deficiencies in Tax Audit Reports as under:

(i) Correct information relating to allowance of depreciation not given in 66 cases involving short levy of Rs. 457.79 crore.

(ii) Correct information regarding brought forward losses /depreciation not given in 46 cases which resulted in loss of tax revenue of Rs. 557.79 crore.

(iii) In 42 cases, personal/capital expenditure not reported resulting in loss of tax revenue of Rs. 477.89 crore.

(iv) Certified wrong information/claims in 74 cases for various exemptions having a tax effect of Rs.259.72 crore.

(v) Incorrect/incomplete information given in Tax Audit Reports of 132 cases, which had resulted in loss of tax revenue of Rs. 1037.61 crore.

(vi) Wrong information given in 7 cases for allowance of provisions in Form 3CD, resulting in loss of tax revenue of Rs. 22.31 crore.

(vii) In 27 cases, the tax auditors did not calculate the Book Profit u/s. 115JB.

(viii) In 153 cases, the tax auditors gave incorrect/incomplete information about Transfer pricing transactions.

(ix) In 308 cases, the tax auditor failed to point out the disallowance to be made u/s 40A (3).

(x) In 78 cases, special Audit u/s. 142(2A) was ordered. Income of 16 assessees was increased by Rs.197.79. on the basis of these reports. This indicates that the original Auditor did not perform the task properly.

It appears that the C&AG has taken the view that tax audit u/s. 44AB is to be conducted by an “Accountant” as defined in section 288. If we refer to section 288, such audit can be conducted by a ‘Chartered Accountant’ only and not by a Firm of Chartered Accounts. On this basis, he has pointed out 22 cases where some Chartered Accountants have signed more than 45 tax audit reports for A.Y. 2013-14. The C&AG has given the names of these Chartered Accountants in Para 3.6 of his report. This list shows that one member has signed 2,471 tax audit reports. There are others in the list, who have signed 401 to 990 tax audit reports.

The C&AG has pointed out that according to the guidelines of the ICAI, there is a limit of 45 (now 60) tax audits per member. Therefore, these 22 members have violated the above guidelines.

The C&AG has recommended that the ICAI and the tax department should take disciplinary action against the various members for their negligence in giving tax audit reports. The Report of C&AG contains names and membership numbers of all these members.

It may be noted that earlier, in the case of Vijay V. Meghani vs. DC17, the Mumbai ITA Tribunal had passed serious remarks about deficiencies in the professional services rendered by our members. Recently, the Delhi Tribunal has made similar remarks in the case of Wrigley India Pvt. Ltd vs. ACIT. In this case, the Tribunal has observed that Transfer Pricing Study and certification by a CA does not inspire any confidence. It is also observed that the level of professionalism is “Pathetic”. No purpose is served by relying on such reports.

The above observations by the C&AG and the ITA Tribunal are of a serious nature. It is reported that the ICAI council has decided to take steps against the members in whose cases professional misconduct is observed. Cases of Members who have signed Tax Audit Reports in excess of the limit prescribed by the ICAI will be referred to Disciplinary Directorate. The ICAI will develop an IT based system in co-ordination with the tax authorities, to ensure that members comply with the limit for tax audit prescribed by the ICAI. Issues raised by the C&AG will be studied and discussed with the C&AG. A special cell with proper staff will be created, to deal with such matters in an urgent manner.

2. Swachha Bharat

Prime Minister, Shri Narendra Modi has announced on 25.12.2014 names of nine persons, who will assist the Government in the Swachh Bharat Abhiyan. The name of the ICAI is included in this list. We, as members of the ICAI, have to put in efforts in assisting the Government in its efforts for Swachh Bharat. It appears that the ICAI is drawing up a plan for this purpose.

3. Some Ethical Issues

The Ethical Standards Board has clarified some Ethical issues on Pages 908 and 910 of CA Journal for January, 2015. Some of these issues are as under.

(i) Issue No.1

Whether a Chartered Accountant who is appointed as tax auditor for conducting special audit under the Income-tax Act by the IT Authorities is required to communicate with statutory auditor?

Response

Council direction under Clause (8) of Part I of First Schedule to the C.A. Act, prescribes that it would be a healthy practice if a tax auditor appointed for conducting special audit under the Income-tax Act, communicates with the member who has conducted the statutory audit. (

ii) Issue No.2
Whether a Chartered Accountant in practice can use the designation ‘Corporate Lawyer’?

Response

A Chartered Accountant in practice is not permitted to use the designation ‘Corporate Lawyer’.

(iii) Issue No.3
Whether the office of a Chartered Accountant is permitted to go in for ISO 9001: 2000 certification or other similar certifications?
Response

There is no bar for a member to go in for ISO 9001:2000 certification or other similar certifications. However, the member cannot use the expression like “ISO Certified” on his professional documents, visiting cards, letter heads or sign boards etc.

(iv) Issue No.4
Whether an auditor is required to provide to the client or to main auditor of the Head Office of the same enterprise access to his audit working papers?

Response:

Working papers are the property of an auditor. An auditor is not required to provide the client access to his audit working papers. The main auditors of an enterprise do not have right of access to the audit working papers of the branch auditors except in case it is required by the Regulatory norms.

(v) Issue No.5

Can a Chartered Accountant in Service accept or agree to accept any part of fees, profits or gains from a lawyer, a Chartered Accountant or broker engaged by such company, firm or person or agent or customer of such company firm or person by way of commission or gratification?

Response:

Clause (2) of Part II of First Schedule to the C.A. Act, prohibits a member in service from accepting or agreeing to accept any part of fees, profits or gains from a lawyer, a Chartered Accountant or broker engaged by such company, firm or person or agent or customer or such company, firm or person by way of commission or gratification.

4. EAC Opinion:

Accounting Treatment of Contribution to a Cluster Project

Facts
A company is an unlisted public limited company and an auto-ancillary engaged in the business of manufacture of Cast Iron (C.I.), castings and machining of castings automobile parts. The foundry and the machining facilities are located at Kolhapur in the state of Maharashtra.

The company requires to use substantial quantity of silica sand in the foundry for making moulds. The sand once used cannot be used again and it becomes waste sand.
The disposal of waste sand is becoming difficult due to non – availability of proper place for dumping and on account of environmental issues and stringent restrictions from pollution control department. The problem of disposal of the waste sand is becoming expensive and severe day by day.

The availability of fresh sand is also diminishing owing to measures being taken by the State Government to protect the environment for silica and mining, which in turn, has increased the costs of procurement of silica sand.

To overcome this problem all the foundries from Kolhapur came together through their association and decided to undertake a cluster project mainly to set up a sand reclamation plant. A limited company registered u/s. 25 of the Companies Act, 1956 is formed as Special Purpose Vehicle (SPV). The objectives of the cluster company (i.e. SPV) are not to make profit. The Central and the State Governments have declared incentives and benefits in the form of subsidies for formation of such cluster projects which provide common utilities and services to its members. In the cluster project each member of the cluster has to contribute non refundable amounts calculated based on its requirement of sand reclamation. The com-pany is required to pay a non-refundable one-time contribution on the basis of formula for contribution decided by the cluster.

The company has clarified that it is a general member under ‘Sand Reclamation Category’. The contribution for sand reclamation category is one time at Rs. 6,000/- per metric tonne/ per month of sand reclamation requirement. At this rate, the company desires to make one time contribution of Rs. 42/- lakh with a view of book the capacity of 700 tons. According to the company, the sand reclamation benefits are permanent and it is not envisaged that the entitlement would exhaust any time. The company has paid an advance against its contribution and the balance is required to be paid in five equal installments. The advance paid is shown as advance under long term loans and advances. The company has clarified that it has not received any ownership rights over the SPV and neither the membership nor the benefits can be transferred.

Query:

The company has sought the opinion of the Expert Advisory Committee as to what is the appropriate accounting treatment?

EAC Opinion:

The committee notes that a SPV has been set up by the industrialists in the Kolhapur region in the form of a not-for-profit section 25 company under the Companies Act, 1956, to undertake a cluster project to set project to set up a sand reclamation plant for the benefit of its members including the company. Each member of the SPV Company is required to contribute a non-refundable amount towards the cost of setting up the sand reclamation plant based on its monthly requirement of sand reclamation. The question now arises is whether such contribution can be capitalised as an asset or should be expensed.

After considering the definitions of the terms ‘intangible asset’ and ‘asset’ given in paragraph 6 of AS 26 and meaning of ‘control’ in paragraph 14, the Committee is of the view that an item can be classified as an intangible asset only if it fulfills all the three conditions (a) it is identifiable, (b) the enterprise has control over the resource, and (c) it is expected that future economic benefits will flow to the enterprise. The Committee notes that in the Company’s case, the contribution entitles the company the services of reclamation of sand upto 700 M.T. per month and various other services, utilities and facilities provided by the SPV at a reasonable cost. Thus, contribution made by the company gives rise to a membership right in the SPV for the company, which is identifiable and from which future economic benefits are expected to flow to the company. Further, with regard to control, the Committee notes that to the extent of its entitlement for sand reclamation of 700 M.T. per month, the company enjoys unrestricted services. Thus, although the company does not get any ownership right over the SPV, the company has the control over the reclamation entitlement and other benefits attached with the membership rights. Accordingly, the Committee is of the view that the membership right received as a consideration of the total contribution of Rs. 42 lakh made by the company to the cluster project should be recognised as an intangible asset.

With regard to the amortisation of the intangible asset, after considering the paragraph 63 of AS 26, the Committee is of the view that as the future economic benefits embodied in an intangible asset are consumed over time, the cost of the asset should be systematically allocated over the asset’s useful life. The Committee is of the view that for determining the useful life of an intangible asset, various factors, such as, the expected usage of the asset, the period of control over the asset and legal or similar limits on the use of the asset etc., as indicated in paragraph 64 of AS 26, need to be considered. Accordingly, the Contribution made by the company to the cluster project should be amortised over its useful life rather than the pay-back period or a period of 3-5 years, considered reasonable by the company.

With regard to the company’s contention that the sand reclamation benefits are permanent and it is not envisaged that the entitlement would exhaust any time. The Committee, after considering paragraphs 67 and 68 of AS 26, is of the view that an intangible asset may have a useful life longer than ten years but it is always finite. The company should disclose the reasons if the presumption of useful life of 10 years is rebutted and the factor(s) that played a significant role in determining the useful life of the asset. Thus, keeping in view the facts and circumstances of each case, the useful life of an intangible asset has to be determined. [Page Nos. 940 to 944 of C. A. Journal – January, 2015]

5. New Accounting Standards (IND – AS):

The Ministry of Corporate Affairs has prescribed the road map for the implementation of the new Accounting Stan-dards (IND-AS) for certain specified Companies. Notifica-tion for this will be issued by the Government very soon. IND-AS are close to the International Financial Reporting standards (IFRs). The companies to which these stan-dards will apply are as under.

Companies with a Net worth of Rs. 500 crore or more, can follow IND-AS on voluntary basis in F.Y. 2015-16. IND – AS will be mandatory for such companies from F.Y. 2016-17. This requirement will apply to Holding, Subsidiaries, Joint Venture and Associates of such companies.

Listed Companies with Net Worth of less than Rs. 500 crore and other Companies with Net worth between Rs. 250 crore and Rs. 500 crore can follow IND-AS on voluntary basis in F.Y. 2015-16 and 2016-17. From F.Y. 2017-18, this will be mandatory for such companies.

6. ICAI News:

(Note: Page Nos. given below are from CA. Journal of January 2015)

(i) Revised Format of Auditor’s Report:

ICAI has revised the format of Auditor’s Report as well as the Engagement Letter for statutory Audit of the Financial Statements under the Companies Act, 2013. This is available on the website of the Institute. (P.895)

(ii) Pre-Budget Memorandum:

ICAI has submitted to the Government Pre-Budget Memorandum. Full text is available on ICAI website. (P.895)

(iii) New Overseas Chapter:

ICAI has opened its 24th Chapter in Vancouver in British Columbia in Canada. (P 895)

(iv) ICAI New Publications:

Following new publications are issued by ICAI (P.1026)

Background Material on GST

Technical Guide on Gujarat VAT

Technical Guide on Rajasthan VAT

Technical Guide on Jharkhand VAT

Extension of Last Date for CPE Hours Requirement:

ICAI has extended the last date for compliance with re-quirement for CPE Hours for 2014 from 31/12/2014 to 31/3/2015.

ICAI and its members

1. Disciplinary Cases.

The Disciplinary Committee (DC) of ICAI has decided the following cases and held the concerned members as guilty of professional misconduct. These cases are reported in the publication of ICAI “Disciplinary Cases” which has been published for the information of Members only. The names of the Members are not given in order to maintain Confidentiality.

(i) Case of Mr. A.C.

In this case, the Firm of Mr. ‘A.C’ audited the accounts of ST Pvt. .Ltd. It was reported by R.B.I. that the Company carried on the business of NBFC without obtaining NBFC registration from RBI. This contravention of NBFC Regulations was not reported by the auditors. On inquiry, the D.C. found the member guilty of professional misconduct under clause (7) of Part I of Second Schedule to C.A. Act. In its order dated 12-09-2011, the Disciplinary Committee has Reprimanded the member

(ii) Case of Mr. M.J.

In this case the member was statutory auditor of a Nationalised Bank. He also conducted the Revenue Audit of the same Bank. When this fact was brought to the notice of ICAI, inquiry was made by the D.C. After a detailed enquiry, the D.C. held that the member was guilty of professional misconduct under clause (4) of Part I and clause (3) of Part II of the second schedule to the C.A. Act. After considering the facts of the case and submissions of the member the D.C. decided on 12-09-2011 to issue a “letter of caution” to the member advising him to be more careful in future in complying with Code of Ethics of the Institute.

(iii) Case of Mr. M.K.

In this case the member was a partner of C.A. firm ANA. He had ceased to be a partner w.e.f. 01-07- 2007. But, he continued to sign several official documents of the C.A. firm after his resignation from the firm. He also conducted statutory audit of one of the clients of the C.A. firm after his resignation and collected Audit Fees from the client in his personal name. On complaint by a partner of the C.A. firm, the D.C. after inquiry, held the member guilty of professional misconduct under clause (2) of Part IV of first Schedule to C.A. Act. By its order dated 12- 09-2011, considering the facts and submissions, the D.C. has “Reprimanded” the member.

2. Some Ethical Issues

The Ethical Standards Board of ICAI has given answers to some Ethical Issues as under, on pages 858 – 860 of C.A. Journal of December, 2013.

(i) Issue No. 1:

Whether the office of a Chartered Accountant is permitted to go in for ISO 9001-2000 certification or other similar certifications?

There is no bar for a member to go in for ISO 9001- 2000 certification or other similar certifications. However, the member cannot use the expression like “ISO Certified” on his professional documents, visiting cards, letter-heads or sign boards etc.

(ii) Issue No. 2:

Whether communication with previous auditor is necessary in case of appointment as statutory auditor by nationalised and other Banks?

Clause (8) of Part I of the First Schedule to the CA Act is equally applicable in case of nationalised and other Banks and also to Government agencies.

(iii) Issue No. 3:

Whether communication by the incoming auditor is mandatory with the previous auditor in respect of various audit assignments, like the concurrent audit, revenue audit, tax audit and special audits etc?

The requirement for communicating with the previous auditor would apply to all types of audits viz. statutory audit, tax audit, internal audit, concurrent audit or any other kind of audit. The Council has laid down detailed guidelines in this regard and the same are appearing in the Code of Ethics, 2009 edition.

3. EAC Opinion:

Recognition of Free of Cost Equipment Provided by a Contractee to the Contractor.

Facts:
A company is a defence public sector undertaking under the Ministry of Defence and is engaged in the construction of Warships and Submarines. For a particular class of ship construction, the company entered into an agreement with the buyer for the construction and delivery of 3 ships. The company has agreed for construction of 3 ships on ‘Fixed Price’ basis with variable component in respect to certain items.

The buyer intimated to the company that certain equipments, out of variable cost items, will be supplied by him at ‘free of cost’ for installation on board of ship. There are certain equipments for which orders are directly placed and also paid by the buyer. These equipments are known as “Buyer Furnished Equipment” (BFE) and are delivered to the company ‘free of cost’ for installing in the ship. The labour cost of installation is included in the fixed price component of the contract.

Query:
From the above, the company has sought the opinion of the EAC on the following issues: (i) Whether the Buyer Furnished Equipment’s (BFE’s) cost can be considered as inventory (simultaneously creating liability to the buyer) and then on issue to ship can be taken in WIP, so that accretion to WIP will be recognised as revenue (ii) Whether BFE’s value can be considered as a part of sale value in the year of delivery.

Opinion:
The Committee has noted before any item can be recognised as an inventory, it should meet the definition of ‘asset’ as given in paragraph 49 of the Framework for the Preparation and Presentation of Financial Statements issued by ICAI i. e. “An asset is a resource controlled by the enterprise as a result of past events from which future economic benefit are expected to flow to the enterprise”.

The Committee has also noted from the Facts of the Case that orders in respect of BFEs are directly placed by the buyer and also payment in respect of them is made by the buyer. These are then supplied to the company for installing in the ship and the buyer pays installation charges which are included in the contract price. Thus, the company has neither incurred any cost on BFEs nor any amount is recoverable on account of such equipment except installation charges. Accordingly, the EAC is of the view that such equipments are not ‘assets’, that may be a considered as a part of its contract workin- progress. In fact, after installation in the ship, BFEs are returned to the buyer after completion of the ship. Thus, these are only held by the company in the capacity of a bailee. Since, these cannot be considered as ‘asset’, therefore, these can neither be considered as ‘inventory’ nor as work-in-progress.

Accordingly, these cannot also be considered as a part of sale value or revenue of the company as no consideration would be receivable in respect of the cost of such equipments. (Refer pages 886-888 of C.A. Journal for December, 2013).

4. The Financial position of ICAI

The Summarised Audited Income and Expenditure Account for 2012-13 and Balance Sheet as at 31.3.2013, as published with 64th Annual Report of the Council, is as under.

There are following three Notes to Accounts which are significant.

“(i) The Institute is registered under section 12A of the Income Tax Act, 1961 and eligible for exemption of income under section 11 of the Act. In financial year 2009-10, the assessing Officer denied Exemption u/s 11 of the Act and raised demand of Rs. 51.70 crore. The Institute had filed appeal against the said Order of Assessing Officer before CIT (A) who allowed the Appeal vide Order dated 12.09.2013.

(ii) The Institute has filed SLPs before the Hon’ble Supreme Court against the Orders of the Hon. Delhi High Court, in the Writ Petition filed by the Institute for the financial year 2006-07 against the Orders passed by DGIT(E) denying exemption U/s 10(23C) (iv) of the Income Tax Act, wherein the High Court held that the activities of the Institute fall under the category of “advancement of any other object of general public utility” within the meaning of Charitable Purpose” as defined in section 2(15) of the Income Tax Act, 1961. The Hon’ble Court also observed in the same Orders that the Institute is also engaged in the educational activities as it conducts various Post Qualification Professional courses for its Members. It has been pleaded that the main activities of the Institute are Educational Activities and other activities carried on by the Institute will only fall under the category of “advancement of any other object of general public utility”. The Income Tax department has also filed a SLP against the order of the Delhi High Court for the financial year 2006-07. The Apex court has tagged the said matter along with the Institute’s SLP and granted leave to appeal.

(iii) In respect of the proposed Nagpur Centre of Excellence, during the financial year 2012-13, a sum of Rs. 9.75 CRORE was paid to M/s. Luxora Infrastructure Pvt. Ltd. towards Centre of Excellence project at Nagpur through two separate – principal and supplementary agreements. Supplementary agreement has since been cancelled by executing deed of cancellation. A total refund of Rs. 5.87 crore out of Rs. 9.75 CRORE has been received till the finalization of Accounts. For balance sum due amounting to Rs. 3.88 crore, a cheque dated 07- 10-2013 has been received from the vendor. The cancellation of principal agreement shall be done after credit of the balance amount. The net effect of this transaction shall be accounted for on receipt of balance consideration and stamp duty”.

5. ICAI News:

(Note: Page Nos. given below are from C.a. Journal for december, 2013)
(i) Companies Act, 2013 not Applicable for May 2014 Examinations:

The Companies Act, 2013 notified in the Official Gazette on August 30,2013. (with partial enforcement of only 98 sections of the Companies Act, 2013 from 12TH September, 2013) shall not be applicable to the May, 2014 examinations of both Intermediate (IPC) and Final Courses. (Page No: 855)

(ii) DVD of 61 years of C.A. Journal

DVD containing 61 years of C.A. Journal has been released. This contains Journal Issues for July, 1952 to June 2013 in searchable mode. Readers can search the contents through key words relating to Accounting, Auditing, Taxation etc. besides searching by month, year, category, author etc. This DVD will be available for sale by the Institute on 1st January, 2014 onwards. (Page No: 832).

ICAI And Its Members

The Disciplinary Committee (DC) of ICAI has decided some cases. These cases are reported in the publication of the ICAI “Disciplinary Cases” VOL- 1. The page Nos. Given below are from this book. The names of Members are not given, in order to maintain confidentiality.

(I) Case of Mr. T. G.

In this case, a Public Sector Bank had complained that the Member, being the concurrent auditor of a Branch, failed to report in their Audit Report for January about certain exceptional and fraudulent transactions. If reported, the Bank could have averted the huge loss suffered by it. Some of the items of high withdrawals by certain parties, some return of large value clearing cheques, kite flying operations of the above parties and some of the other irregularities were listed by the Bank in its complaint.

The defence of the Member was that these irregularities started prior to his appointment as a concurrent auditor. He was not getting enough co-operation from the Branch Staff. Therefore, after submitting the report for one month he had resigned. Further, in one month’s audit it was not possible to unearth a deliberately concealed irregularity. After a detailed inquiry, the DC was not satisfied with the explanation given by the Member and held him guilty of professional misconduct under Clauses (7) and (8) of Part I of the Second Schedule to C.A. Act. However, the DC considered the facts that (i) although the Member was appointed as a concurrent Auditor for the year, he conducted audit for one month only and then resigned, as he did not get sufficient co-operation from the staff of the Branch, (ii) in one month’s span it was not feasible to unearth a perpetual fraud which had been going on for many years and (iii) the role of the member was limited to one month’s audit. On these facts, the DC awarded punishment by way of ‘Reprimand’ only . (P. 114 – 125 of Part I of Vol. -I ) (ii) Case of Mr. S. S. G. In this case, the Excise Intelligence Department had reported that (a) the Member had given an opinion to S.A. Ltd. that no service tax was payable by the company, (b) the Company did not deposit this tax which amounted to evasion of the service tax of about Rs. 142.45 crore and (c) the member had admitted that he had isued the opinion. Before the DC, the Member explained that he was appointed as a retainer of the Group. He also stated that the opinion was given to the company on the query whether the services provided by the company would be liable to service tax under the head Advertising Agency. Thus, the scope was limited to this one category of service. Further, the opinion was not given to the Excise Department but to the company. The Member also explained that this opinion was based on the decision in the reported case of Advertising Club vs. CBEC ( 6 STT 196-MAD). After a detailed enquiry, the DC accepted the submission of the Member and held that he was not guilty of professional misconduct. (P. 98 to 103 of Part II of Vol.I). (iii) Case of Mr. S. J. In this case, the Joint Commissioner of Sales tax filed the complaint against the Member. It was alleged that the Member had certified two different sets of financial statements of BPP Ltd. for 2004-05, 2005-06 and 2006-07 in the name two Firms viz. M/s. J & D and M/s. M.R. & Co. The first set signed in the name of M/s. J & D was filed by the company with the bank and the second set was filed with the Sales Tax Department. This amounted to Professional Misconduct. Before the DC, the Member explained as under: (a) The firm of M/s. J & D was dissolved on 01-04-2005 when it merged with M/s. M.R. & Co. (b) He had signed financial statements of BPP Ltd. as

(ii) Case of Mr. S. S. G.

In this case, the Excise Intelligence Department had reported that (a) the Member had given an opinion to S.A. Ltd. that no service tax was payable by the company, (b) the Company did not deposit this tax which amounted to evasion of the service tax of about Rs. 142.45 crore and (c) the member had admitted that he had isued the opinion. Before the DC, the Member explained that he was appointed as a retainer of the Group. He also stated that the opinion was given to the company on the query whether the services provided by the company would be liable to service tax under the head Advertising Agency. Thus, the scope was limited to this one category of service. Further, the opinion was not given to the Excise Department but to the company. The Member also explained that this opinion was based on the decision in the reported case of Advertising Club vs. CBEC ( 6 STT 196-MAD). After a detailed enquiry, the DC accepted the submission of the Member and held that he was not guilty of professional misconduct. (P. 98 to 103 of Part II of Vol.I).

(iii) Case of Mr. S. J.

In this case, the Joint Commissioner of Sales tax filed the complaint against the Member. It was alleged that the Member had certified two different sets of financial statements of BPP Ltd. for 2004-05, 2005-06 and 2006-07 in the name two Firms viz. M/s. J & D and M/s. M.R. & Co. The first set signed in the name of M/s. J & D was filed by the company with the bank and the second set was filed with the Sales Tax Department. This amounted to Professional Misconduct. Before the DC, the Member explained as under:

(a) The firm of M/s. J & D was dissolved on 01-04-2005 when it merged with M/s. M.R. & Co.
(b) He had signed financial statements of BPP Ltd. as Partner of M/s M.R & Co. for 2004-05 to 2006-07.
(c) The financial statements, alleged to have been signed by him as partner of M/s. J & D for these three years and filed by the company with the Bank were forged by someone. The firm of M/s. J & D was not in existence from 01-04-2005 onwards.

The DC, after examining the evidence produced before it, came to the conclusion that the financial statements filed by the company with the Bank, which were alleged to have been signed by the Member as partner of J & D were forged by someone. On this finding, the DC held that the Member was not guilty of professional misconduct ( P. 111 to 117 Part II of Vol. I).

ICAI and its members

1. Disciplinary Cases:

The Disciplinary Committee (DC) of ICAI has decided that some cases have been awarded punishment for professional or other misconduct. These cases are reported in the publication of ICAI “Disciplinary Cases” Vol-I. The Page Nos. given below are from this Book. The names of members are not given in order to maintain confidentiality.

(i) Case of Mr. O. P. P.

In this case the member had obtained a Tax Audit assignment of 13 Societies of Sahakari Banks in a particular District in the name of M/s RRCO, a C. A. Firm in which he was a partner. This was without informing the other partners of the firm. He prepared the letter heads of the Firm on his computer and prepared the seal of his firm. He submitted the Tax Audit Reports, using the above letter heads and seal etc. and affixed the signature of his partner on Audit Reports and related documents.

The above bogus Audit Reports and related documents were submitted to the Bank and the Income-tax Department. He collected the fees from the Bank and issued receipts. The amount was also collected by him personally without informing the Firm and other partners.

At the time of hearing before the D.C. the member did not appear. He also did not submit a written statement. The D.C., after considering the records held him guilty of professional misconduct under Clause (2) of Part IV of First Schedule to C. A. Act. On consideration of the facts of the case D.C. awarded punishment by way of Removal of the Name of the Member for a period of 3 months (P. 89-95 Vol. I Part I).

(ii) Case of Mr. J. L. K.

In this case the ROC informed ICAI that the Inspection u/s. 209A of the Companies Act was carried out in the case of R. L. Ltd. During the course of this inspection it was noticed that the member (Statutory Auditor) had failed to point out the following violations of the Companies Act:

(a) He did not report about Impairment of Investments;

(b) He did not report about non-provision of loss on Investment.

At the time of hearing before the D.C. the member stated that he had made an application u/s. 621A of the Companies Act for compounding the offence before the R.O.C. He also made submissions and tried to explain that AS-26 was not applicable in this case. However, on further questioning by the D.C., the member admitted his guilt and requested that D.C. may take a lenient view in the matter.

On consideration of the information received from the R.O.C. and submissions made by the Member, the D.C. held that the Member was guilty of professional misconduct under Clause (7) and (9) of Part 1 of the Second Schedule to the C. A. Act. With regards to the facts of the case the D.C. awarded punishment by way of “Reprimand” to the Member. (P. 96-103. Vol. I Part I).

(iii) Case of Mr. R. K. K.

In this case the Member was a full-time employment of CB Ltd. Simultaneously, he was also holding a Certificate of Practice (COP) and was carrying on the C. A. profession in the name of R. K. & Co. The Complainant alleged that during the course of his C. A. practice, he was also carrying on the Attest Function. This was not permitted under the C. A. Act and Regulations.

Before the D.C., the Complainant did not attend. The Member attended and submitted that it was his mistake which happened inadvertently. As soon as he came to know that he cannot do the attestation work under Regulation 190A he stopped doing attestation work.

The D.C. noted that the Member had taken permission of the Institute to hold COP while in fulltime employment. Therefore, it was his mistake to have done attestation work. However, the D.C. accepted the explanation of the Member that the said attestation work was undertaken due to the ignorance of the amendment in Regulation 190A and no mala fide intention on his part was proved. In view of this, the D.C. gave the benefit of doubt to the Member and held him Not Guilty of Professional Misconduct. (P. 33 – 36 Vol. I Part II).

2. Some Ethical Issues:

The Ethical Standards Board of ICAI has given answers to some Ethical Issues on Pages 1325-1326 of C. A. Journal for March, 2014. Some of these issues are as under:

(i) Issue No: 1

Whether a statutory auditor is eligible for appointment u/s. 217(6) of the Companies Act with the duty of seeing that the provisions of s/s. (1) to (3) of section 217 are complied with, particularly with regard to “Directors Responsibility Statement?”

The Companies Act, 1956 requires the Directors to prepare the Directors’ Responsibility statement regarding the fulfillment of their responsibilities to prepare the financial statements of the company in accordance with the applicable accounting standards and other generally accepted accounting policies and principles. The auditors’ responsibility is to express opinion on the financial statements, based on their audit. In view of the above, the question of asking the statutory auditor to certify the Directors’ Responsibility Statement does not arise.

(ii) Issue No: 2

Whether a member in practice will be liable in a case where he was alleged to have signed two balance sheets on two different dates for the same financial year, the first one with a clean report and the second one with a qualified report?

The action of the Chartered Accountant in signing the two Balance Sheets on two different dates for the same financial year will constitute as a professional misconduct under Clause (7) of Part I of Second Schedule to the C. A. Act which states that a member in practice shall be deemed to be guilty of professional misconduct, if he is grossly negligent in the conduct of his professional duties.

(iii) Issue No: 3

Can a Chartered Accountant receive his professional fees in advance partly or in full?

There is no bar in the C. A. Act or in the C. A. Regulations as well as Code of Ethics in taking the fees in advance.

3. EAC Opinion:

The consolidation of ESOP Trust in the stand-alone financial statements, the treatment of investment in their own shares for EPS calculation in the stand-alone financial statements and the treatment of ESOP Trust in the financial statements for tax audit purposes:

Facts:
A listed Company “A” Ltd., has the statutory year ending on 31st December. In the year 2011, the company started the new Employee Stock Option (“ESOP”) Scheme, whereby, the employees would be granted options (directly linked to individual, team and company performance) at an exercise price equal to the face value of the share (currently at INR 5). The company has created a Trust for this purpose, as the “ESOP Trust” or “ESOPT”. The ESOP Trust obtains its fund through a loan from the company, which it utilises for the purchase of the company’s shares. It receives shares from the company by way of fresh allotment. The ESOP Trust then allocate shares to employees for exercise of their right in exchange of cash and repays its loans.

The Company has drawn attention to Paragraph 45 of the “Guidance Note on Accounting for Employee Share based Payments” issued by the ICAI which states that as per the Accounting Standard (AS)- 21 “Consolidated Financial Statements,” the Trust created for the purpose of administrating the employee sharebased compensation should not be considered for consolidation. Therefore, the consolidation of gratuity trust, provident fund trust, etc., is not required. While Clause 22A.1 of SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 requires that the accounts of the Trust should be included in the stand-alone financial statements of the company as if all the transactions of the Trust are those of the company. Therefore, the loan given by the company to the ESOPT will not appear in the company’s stand alone financial statements. Further, the shares held by the trust at the year end, the face
value of the shares should be shown as a deduction from the share capital and excess amount paid, over and above the face value, should be shown as deduction from security premium with details explaining the facts.

Further, the company has to prepare a separate
financial statement u/s. 44AB of the Income -tax Act,
1961 for the year ended 31st March. The company
being listed has also to follow the SEBI Guidelines.
Therefore, while preparing the annual accounts it
will follow the SEBI Guidelines and, while preparing
financial statements for 31st March, it will follow ICAI
Guidance Note

Query:

On the basis of above facts, the company has sought
the opinion of the EAC on the issues (i) whether, in
the stand-alone financial statements of the company
for the year ended 31st December, the loan given by
the company to ESOPT should be shown as “Loans
to ESOPT” under “Assets” or operations of the
ESOPT should be included in the stand-alone financial
statements of company. If the operations of ESOPT
are included in stand-alone financial statements
of the company, then, how to disclose shares of
the company held by ESOPT? (ii) In the stand-alone
financial statements of company, for the purpose of
calculating basic and diluted earnings per share, how
do we consider investment in their own shares? (iii) Will
the above treatment also be followed in the financial
statements prepared u/s. 44AB of the Income-tax Act,
1961 for the year 31st March, i.e., the company requires
to follow the requirements of the ICAI’s Guidance
Note or the SEBI Guidelines?

EAC Opinion:

The Committee is of the view that, in case of listed
companies, if there are certain differences between
“ the Guidance Note “ issued by ICAI and the “SEBI
Guidelines” then to what extent will the requirement
of the SEBI Guidelines differ from the Guidance Note,
the SEBI Guidelines will prevail?

Though the ESOPT itself may prepare its own financial
statements, e.g., to meet the regulatory requirements,
the stand-alone financial statements of the company
should portray the picture as if the company itself
is administrating the ESOP Scheme The Committee
is of the view that this has two reasons viz; (i) the
company should recognise any expense arising from
the employee share based payment plans , and the
operations of the ESOPT are included in the standalone
financial statements of the company in so far
as the ESOP is concerned. In such a situation, in the
stand-alone financial statements of the company, the
“Loans to ESOPT” will not appear at all, i.e., loans to
ESOPT in the books of company should be eliminated
against the loan from the company as appearing in the
books of Trust. (ii) The amount representing the grant
date, intrinsic value of the options yet to be exercised
by the employees, will be added to the “Investment in
shares of the company” and the sum may be described
as “Shares held in trust for employees under ESOP
Scheme”. This should be presented as a deduction
from the share capital to the extent of face value
of the shares and Securities Premium to the extent
of amount exceeding the face value of shares. The
company should give a suitable note in the Notes to
Accounts to explain the nature of this deduction.

As per the facts of the case, the Committee notes, that
the employees would be granted stock options which
are directly linked to individual, team and company
performance. Therefore, the Committee is of the view
that such performance base employee stock options
should be treated as contingently issuable equity
shares under AS 20 and the principles enunciated in
AS 20 in respect of options and contingently issuable
equity shares are equally applicable for shares allotted
to ESOPT which, in turn, will be allotted in the future
to employees on exercising their options. For the
purpose of calculating basic EPS in the stand-alone
financial statements of the company, the shares
allotted to the ESOPT should be included in the shares
outstanding, only when the employees have exercised
their right to obtain shares, after fulfilling the requisite
vesting conditions. The shares allotted to the ESOPT
are treated as potential equity shares for the whole
or part of a particular reporting period depending on
the conditions. If the requisite-vesting conditions are
not fulfilled, the shares allotted to the ESOPT against
granted options should be considered for calculating
diluted earnings per share. When the shares are
allotted to the ESCOPT are considered for calculation
of basic and diluted EPS in both the situations, they are
weighted.

Lastly, the Committee is of the view that, for the
accounting year, the financial statements should be
in accordance with the SEBI Guidelines, while the
financial statements for the financial year should be
in accordance with the Guidance Note of ICAI. The
financial statements for the financial year should
adopt the same accounting policies and accounting
standards that have been adopted for preparing the
annual accounts that were laid at the AGM.

4. New Committees of Council for 2014-15:

(i) Our New President and Vice-President

Shri K. Raghu (Bangalore) has been elected as our
President and Shri Manoj Fadnis (Indore) has been
elected as our Vice-President for 2014-15 on 12th
February, 2014. We convey our greetings and best
wishes to both for a successful term of office.

(ii) New Committees for 2014-15

4 New Standing Committees and 36 other Committees
of the Council of ICAI have been constituted as per
details on Pages 1404-1407 of the March, 2014 C. A.
Journal.

5. ICAI News:

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

(i) Suggested Amendment in Auditors’ Report u/s
227(3) of Companies Act, 1956.

Reference is invited for Announcement on Page 1414-
1416. On Pages 1415-1416 the following amendment is
suggested.

“Report on Other Legal and Regulatory Requirements
As required by Section 227(3) of the Act, we
report that:

(a) ………………………………………..

(b) …………………………………………

(d) In our opinion, the Balance Sheet, the Statement
of Profit and Loss, and the Cash Flow Statement
comply with the Accounting Standards notified under
the Companies Act, 1956 read with the General Circular
15/2013 dated 13th September ,2013 of the Ministry
of Corporate Affairs in respect of section 133 of the
Companies Act, 2013.”

(ii) Comparision of Firms:

Reference is invited to the following Announcement
on Page 1422.

“It has been brought to the notice of some
members that certain entities are seeking
details of the Chartered Accounts firms, for the
purpose of making ranking of the various firms
through comparison of different parameters.
In this regard, members are hereby informed
that the sharing of details of their C. A. firms, in
the aforesaid manne,r does not fall within the
permitted categories, and would therefore be
violative of Item 6 of Part – I of First Schedule to
The C. A. Act. Further, as it is known beforehand,
that the information regarding firms would be
used for ranking purposes, the sharing of such
details would tacitly result in claiming superiority
of one firm over other, which is prohibited in
terms of the Advertisement Guidelines of the ICAI
under Item 7 of Part – I of first Schedule to The
Chartered Accountants Act, 1949. Members are,
therefore, advised to abstain from such sharing
of details of their Chartered Accountants firms.”

(iii) Applicability of Guidelines on Sexual
Harassment:

“Attention of the members and firms of
Chartered Accountants registered with the ICAI is
hereby drawn to the specific guidelines laid down
by the Hon’ble Supreme Court of India in certain
reported cases. In terms of the said relevant
judgement, followed by the enactment of The
Sexual Harassment of Women at Workplace
(Prevention, Prohibition and Redressal) Act, 2013,
the guidelines so formed shall be applicable to
organisations/bodies/associations/institutions
and persons registered/affiliated with ICAI
including, the office of ICAI its organs at different
levels/locations and offices of members and firms
registered with it. Accordingly, all concerned are
required to follow the aforesaid guidelines in
letter and spirit. (P. 1423)

(iv) Amendment in AS-11:

Reference is invited to Announcement on Page
1424. As members are aware Para 46-46A has been
introduced in AS-11 applicable to Companies. Now ICAI
has announced that these Para 46 and 46A shall be
deemed to be introduced in AS 11 as applicable to noncorporates
also.

(v) New Branches of ICAI:

The following New Branches of ICAI have been opened
on 10-02-2014 (P. 1419-20)

(a) Bharatpur (CIRC) (b) Kurnool (SIRC)(c)
Ranigunj (EIRC)

(vi) New Publications of ICAI:

(a) Educational Material on Indian Accounting
Standard (Ind AS 7) Statement of Cash Flows
(P.1425)

(b) Technical Guide on Internal Audit of
Petrochemical Industry (P. 1425)

(d) Guidance Note on Audit of Banks (P. 1429)
(vii) Revision in Fee of Expert Advisory
Committee:The Fees to be paid for obtaining
Opinion of Expert Advisory Committee have
been increased. Revised Fees w.e.f. 01-04-2014
will be as under: (P.1429)

(a) Listed Companies Rs. 75,000/-

(b) Any Enterprise having
Annual Turnover exceeding Rs. 75,000/-
Rs. 50 Cr.

(viii)
Limit on Tax Audit Assignments:

Council of ICAI has
increased the limit on Tax Audit assignments u/s.
44AB of the Income-tax Act from 45 to 60 w.e.f 01-
04-2014. This increased limit will apply to Tax Audits
to be conducted during F.Y: 2014-15 and onwards.

ICAI and its members

1. Some Ethical Issues

The Ethical Standards Board of ICAI has given answers to some Ethical Issues on pages Page 760 to 762 of the C. A. Journal for December, 2014. Some of these issues are as under:

i) Issue:
Whether a member can appear on television/Radio or give lectures at Forums?

Response:
Council direction under Clause(7) of Part I of the First Schedule to the C.A. Act prescribes that a member may appear on television/Radio or give lectures at forums and may give his name and describe himself as chartered accountant. Special qualifications or specialised knowledge directly relevant to the subject matter of the programme may also be given. But no reference should be made, in the case of practicing member to the name and address or services of his firm. What he may say or write must not be promotional of him or his firm but must be an objective professional view of the topic under consideration.

(ii) Issue: Whether a Chartered Accountant in practice can use expression like Income tax Consultant, Cost Accountant, Company Secretary, Cost Consultant or a Management Consultant?

Response:
Council direction under Clause (7) of Part I of the First Schedule to the C.A. Act 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, whereas it is permitted to mention his degrees.

(iii) I ssue: Whether a Chartered Accountant/Firm is permitted to use logo on letter-heads, stationery, etc.?

Response:
The use of logo/monogram of any kind/form/style/design colour etc whatsoever on any display material or media e.g. paper stationery, documents, visiting cards, magnetic devices, internet, signboard by the Chartered Accountant, firm of Chartered Accountants is prohibited. Use or printing of member/firm name in any other manner tantamounting to logo /monogram is also prohibited. However, a common CA logo has been allowed to the members, provided it is used in the correct manner within terms of the Council guidelines.

(iv) Issue:

Whether a Chartered Accountant in practice can engage in any business or occupation other than the profession of Chartered Accountancy?

Response:
In terms of Clause (11) of Part I of First Schedule to the C.A. Act a Chartered Accountant in practice is not permitted to engage himself in any business or occupation other than the profession of Chartered Accountants.

However, there are the following exceptions to it: (i) A Chartered Accountant can be a Director of a Company (not being a Managing Director or Whole – Time Director), provided he, or any of his partners or the firm in which he is a partner is not Auditor of such Company.

(ii) A Chartered Accountant in practice may engage in any business or occupation with the permission granted in accordance with a Resolution of the Council. Appendix-9 of the Chartered Accountants Regulations, 1988 contains the above resolutions under two heads (A) permission granted generally and (B) permission to be granted specifically.

(v) Issue:
If a member is a partner in more than one firm, is it permissible to print the names of all the firms on visiting cards, letter-heads, stationery etc.?

Response:
There is no violation under Clause (7) of Part I of the First Schedule to the C.A. Act.

2. EAC Opinion Determination of Stage of Completion in Construction Contracts

Facts:
A company incorporated under Companies Act, 1956, is a state public sector undertaking (PSU) and is a wholly owned by the Government of Odisha. The company is an unlisted public company.

The company has stated that since the company has been incorporated specifically for execution of projects of Home Department of the Government of Odisha, it does not participate in tender for obtaining orders from various Government departments.

Further, the company has stated that the revenue is recognised on the basis of contracts executed by the company, which are in the nature of fixed price contracts. Since the company is executing more than 2,000 projects at a time, it is not practically possible for the company to estimate the contract cost to complete the balance work and calculate the stage of contract completion as on the balance sheet date. Furthermore, since there is no correlation between the estimated cost and actual cost of execution, it is not practically feasible to derive the outcome of such huge number of projects unless and until the projects are completed and handed over to the user departments.

Query:
On the basis of the above, the company has sought the opinion of the EAC as to whether the accounting procedure followed by the company for recognition of revenue and expenditure, which is as per Para 31(a), 31(b) and 32 of AS 7 is in conformity with AS 7 or not.

EAC Opinion:
The Committee notes from the Facts of the Case that the company, on the basis of inquiry received from the various Government departments, submits estimates for each project separately as per Odisha Public Works Department (OPWD) Schedule of Rates (SoR). The estimates are submitted after including cost of materials, labour, other overheads and supervision charges which includes its profit margin.

The Committee further notes from the Facts of the Case that the Company has stated two reasons for it not being able to measure the outcome of the project reliably. Firstly, it is stated that the company is executing large number of projects due to which it is not practically possible to estimate the contract cost to complete the balance work and calculate the state of completion as on the balance sheet date. Secondly, it is stated that since there is no correlation between the estimated cost and actual cost of execution due to estimates being based on SoR, it is not practically feasible to derive the outcome of such huge number of projects unless these are completed and handed over to the user departments.

As far as the first reason for not measuring the outcome of the project reliably due to practical difficulties of having large number of projects is concerned, the Committee notes that AS 7 identifies certain situations/conditions wherein, in fixed price contracts, it can be stated that the outcome of the project cannot be estimated reliably. The Committee notes that as per AS 7 in case of fixed price contracts, ordinarily, the company would be able to estimate the outcome of the contract reliably.

Therefore, it should recognise the contract costs and revenue based on stage of completion of the contract. The Committee also notes that as per the provisions of AS 7, stage of completion of a contract can be determined either by reference to the contract costs incurred or by reference to physical completion of the contracts using survey of work performed or completion of a physical proportion of the contract work method. The Committee is of the view that only practical problems due to large number of projects cannot be considered as a ground for not being able to estimate the outcome of the contract reliably as even in large number of projects where the stage of completion is being determined by reference to contract cost incurred, the company, on the basis of estimates of various costs, such as, labour, materials, etc. would generally be able to reasonably estimate the outcome of various projects. However, for this purpose, in order to overcome the practical difficulties, due to number of projects, the company should develop an effective reporting system from all the projects to obtain the data for determining the stage of completion as per AS 7.

As far as the second reason of no correlation between the estimated cost and actual cost of execution of the contract, the Committee is of the view that although for submission of an estimate for a project to the Government departments, it might be essential for the company to use the rates given in Sor, for the purposes of implementation of AS-7, estimates should be based on the costs expected to be incurred on the project and should also be revised from time to time depending on the changes in the circumstances. The Committee is of the view that for this purpose, the company should develop an effective budgeting system so as to have the reliable data available for estimating the outcome of the contracts at any stage and for determining the stage of completion. the Committee is of the view that a proper budgeting and reporting system is not only required from the angle of implementation of aS 7 but it also necessary to effectively manage various contracts.

The Committee further notes that the company has stated that the amount of surplus or deficit in a particular project is not included in the revenue of that project, during a particular year, unless and until the project is completed and handed over to the user departments. On the basis of above, the Committee is of the opinion that accounting procedure followed by the company is not in accordance with the requirements of aS 7.

[Pl. refer page nos. 791 to 797 of the C. a. journal – december, 2014]

3 ICAI news
(Note: Page numbers given below are from the C.A. journal for december, 2014)

(a) ICAI geared up for IFRS convergence new/revised ind aS converged with ifrS will be notified by December end by the Ministry of Corporate Affairs. ICAI has already started a nation wide exhaustive exercise to train the members in the new indian accounting Standards and foresee a global demand of indian Cas with IFRS expertise. New ind as can be applied voluntarily from 2015-16 and will be made compulsory from 2016-17 (P. 746-747)

(b) Guidance Note on reporting on internal financial Controls would be available shortly at offices of Regional Councils of ICAI. However, on a representation made by ICAI, the MCA has amended rules for Chapter 10 (audit and auditors) of the Companies act, 2013 and reporting on internal financial Control u/s. 143(3)(i) has been deferred for one year i.e., upto 31st march,2015. (P.747)

(c) Report on Campus Placement Programme – August – September – October, 2014

Brief summary of the Campus Placement Programme _ august – September – october, 2014.

Particulars

Campus august

– September – october, 2014

Number of Candidates Registered

4,809

Number of Candidates shortlisted

4,208

Number of Interview Teams

154

Number of Organizations

Number of jobs offered

1,019

Number of jobs Accepted

953

Percentage
of jobs offered vis-a vis short- listed candidates

24.22%

Top CTC offered for domestic posting

Sl no.

Company name

Job offered

CtC offered (InR Per annum)

ITC
Limited

17,00,000

Coca-
Cola India Inc

15,00,000

ITC
Limited

14,00,000

Bharat Petroleum Corp. Ltd.,

12,50,000

Cairn India Limited

11,00,000

Highest Salary offered for international Posting was rs. 24,00,000/- (p.a) to 4 Candidates. (P. 866-877)

(d) Secretary of ICAI

Shri T. Karthikeyan who served the iCai for 37 years retired as Secretary on 31-10-2014. our best wishes to Shri Karthikeyan for a healthy and peaceful retirement.

Shri V. Sagar has been appointed as acting Secretary of iCai. our best wishes to him for a successful term in office (P.749)

(e) ICAI President elected as Member of IFAC Board: Shri K. Raghu, ICAI President has been elected as a member of the Board of international federation of accountants (IFAC) on 7th november, 2014. He will hold this office for a period of 3 years. Our Greetings and best wishes to Shri K. raghu for this achievement. We wish him a successful term of office. (P.750).

ICAI and its members

1. Some Ethical Issues
The Ethical Standards Board of ICAI has given answers to some Ethical Issues on pages Page 37 – 38 of C. A. Journal for July, 2014. Some of these issues are as under:

(i) Issue:
Whether a firm can obtain an assurance engagement at a significantly lower fee level than that charged by the predecessor firm or quoted by other firms?

When a firm obtains an assurance engagement at a significantly lower fee level than that charged by the predecessor firm, or quoted by other firms, the threat created will not be reduced to an acceptable level unless;

(a) The firm is able to demonstrate that appropriate time and qualified staff are assigned to the task; and
(b) A ll applicable assurance standards, guidelines and quality control procedures are being complied with.

(ii) Issue:
When does the situation for Potential Conflict arise?

When the responsibilities to an employing organisation and the professional obligations to comply with the fundamental principles are in conflict, the situation of potential conflict arises for the Professional Accountant in service.

(iii) Issue:
What is the distinction between the two schedules to the Chartered Accountants Act, 1949?

The two schedules are distinguished on the basis of gravity of misconduct and quantum of punishment for the misconduct, the second schedule pertains to a comparably graver misconduct and higher punishment.

(iv) Issue:
Can a member in practice render Management Consultancy and other services?

Yes, however, the areas covered under the Management Consultancy and other services have been summarised by the Council, appearing in the Code of Ethics, 2009 Edition.

(v) Issue:
Whether a member in practice is permitted to undertake the management of NRI funds?

No, 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 practicing members of the Institute.

(vi) Issue
Can a Chartered Accountant provide “Portfolio Management Services’ (PMS) as part of CA practice?

No, the Explanation to Clause (xix) of the definition of ‘Management Consultancy and other Services’ expressly bars the activities of broking, underwriting and Portfolio Management.

2. EAC Opinion
Accounting Treatment of Dividend Declared by Mutual Fund in Debt Fund Scheme under Dividend Re-Investment Plan.

Facts
A company (hereinafter referred to as ‘the company’) is a Maharatna Central PSU engaged in mining of coal having touched a production of 452 million tones during the 2012- 13 fiscal year. The company is a direct holding company of nine subsidiaries out of which eight are registered in India and the ninth one is registered in Mozambique.Two of its direct subsidiaries have further three and two sub-subsidiaries, respectively. Further, there are few joint ventures and associate companies which also form part of group accounts. The consolidated turnover of the company for the year 2012-13 was Rs. 88,281 crore with profit before tax of Rs. 24,979 crore. The main object of the company is to produce or otherwise engage generally in the production, sale and disposal of coal and its by products.

The company has stated that the company and its subsidiaries have surplus funds which are invested in bank Fixed Deposits (F.Ds) as well as in mutual funds (debt fund scheme). While the bank Fixed Deposits are shown under the Note ‘cash & bank balances,’ the investment in mutual fund is shown under the Note ‘current investments’ in the balance sheet. The term of the mutual fund is dividend re-investment plan which signifies that the dividend accruing on daily basis of Net Assets Value (NAV) of the scheme as on the date of declaration of dividend, results into increase in the number of total units held by the company.

Query:
In the above background, the company has sought the opinion of the EAC as to whether the dividend declared on a daily basis and credited in the form of additional units in the mutual fund account under debt fund dividend reinvestment plan should be recognised as revenue income as on the date of balance sheet in the final accounts of the company even if the same has not been redeemed/ encashed. If yes, the value at which such recognition is to be made? Or the present conservative practice of the company of not recognising the dividend declared and re-invested in the mutual fund–dividend re–investment plan on the balance sheet date due to non-encashment of such additional units be continued?

Opinion:
In view of the requirements of paragraph 13 of AS 9, the Committee notes that dividend income should be recognised at the time when the unit holder’s right to receive the payment thereof is established. The Committee is of the view that the right to receive is established when dividend is declared. In the extant case, the Committee notes from the Facts of the Case that dividend is declared on a daily basis and credited to the account of the company, which is represented by units determined on the basis of NAV per unit under initial investment of the units. This is reflected in the mutual fund account statement of the company. The Committee also notes from the Dividend Policy under one of the Schemes in the Key Information Memorandum, which is provided by the querist for the perusal of the Committee, that such reinvestment option was available in respect of a liquid fund wherein payout option on a periodic basis was also available. Thus, dividend was realisable both in cash or in kind, i.e., in the form of units of the fund as per the option exercised by the investor. The Committee is further of the view that nature of dividend would not change due to opting for reinvestment of dividend. Change in the value of reinvested units as a function of market price is a separate risk from the risk of investor’s right to receive the dividend. Accordingly, the Committee is of the view that the present practice of the company to defer the dividend declared and re-invested in the mutual fund scheme till the actual redemption of units and realisation of cash is not correct, rather it should be recognized as and when right to receive the dividend is established.

As regards the value at which dividend and investment should be recognised, the Committee is of the view that revenue from dividend should be recognised at the value of dividend received. Similarly, investments should be recognised at the issue price on the date of acquisition of each unit of mutual fund. With regard to any decline in the value of investments occurring subsequently due to market risks involved in mutual fund, viz., fluctuations in the NAV vis-à-vis interest rates etc., the Committee is also of the view that since current investments are carried at lower of cost and fair value, such decline/impairment in value of investment would be recognised while valuing the investments at the reporting date.

(Pl. Refer page nos. 65 to 67 of the C. A. Journal – July,2014)

3. I CAI News i) The following Campus Placement Programme for newly qualified C.As. has been organised by the ICAI during the months of August and September, 2014 (P. 119)

ii) Instructions to Members (P. 124) (a) A ppointment of Auditor of Government/Deemed Government Company:

As per relevant provisions of section 139 of the Companies act, 2013, the auditors of a government/ deemed government Company are to be appointed by the Comptroller and auditor general of india, therefore it is instructed that members should not take up the statutory audit of any government/deemed government Company without getting the appointment letter issued by the O/o C & AG.

(b) The hon’ble President of india addressed the iCai international Conference held in Kolkata in november, 2013. the gist of his address: (P.117)

In present times, we live in a world which offers a vista of opportunities for those who can handle the accompanying serious challenges. The subprime crisis and Eurozone crisis had adversely impacted the global economy including the BRICS nations. The same have reinforced of role of accounting professionals in discharging their responsibility to create public trust. Ethical standards would result in fruitful communication to stakeholders. a highly robust framework was required in the accounting/auditing/financial reporting, Psu accounting and accounting innovation. The ICAI has a big role to play in furthering india’s economic growth by providing inputs to the government in various fields as well as effective implementation of schemes such as mgrega.

ICAI and its members

1. Disciplinary Cases

(i) Case of RA
(Reported in Disciplinary Cases Vol-II – Part II published by ICAI – P.39)

The CIT (DR) made a complaint against the member that the company of which he was the Auditor had not made provision of wealth tax payable by the company. According to the complainant, the vacant land belonging to the company was valued by the valuer at Rs. 111 crore and the wealth tax liability worked out to a figure which was more than the net profit disclosed in the accounts. The auditor had not qualified the Audit Report on this issue.

The defence of the member was that the valuation report was neither obtained by him or by the company. It was obtained by a sister concern of the company and the member was not aware of the same when he gave the Audit Report. The book value of the land was only Rs. 11.74 lakh and the valuer had valued the land at Rs. 111 crore without giving any basis. Further, the member had relied on the management representation to the effect that the land was subject to numerous litigations and there were restrictions for construction. Therefore, the management was of the view that no wealth tax was payable.

The Disciplinary Committee (DC), after consideration of the facts of the case, has taken the view that there could be difference of opinion on the question of valuation of an asset and the same in no way can be construed to be a lack of due diligence or gross negligence. On this basis the member was held to be Not Guilty of Professional or other Misconduct.

(ii) Case of SSR
(Reported on Page 1 of Disciplinary cases published by ICAI Vol – II, BoD – Part II)

In this case the complaint was that the Member had accepted Tax Audit assignment of the company in which the complainant was the Auditor in earlier years without communicating with the complainant. The defence of the Member was as under:

(i) T he complainant who had conducted Tax Audit in earlier years had declined to continue Tax Audit for the year under complain.

(ii) The company had informed the complainant that they were searching a new firm of auditors for Tax Audit. The management informed the member that they had taken consent of the outgoing auditors for appointment of the Member as Tax Auditor.

(iii) The member had taken oral consent of the complainant for his appointment as Tax Auditor. He was informed that no fees of complainant were outstanding. He also submitted that he was not aware that written consent of the complainant was required to be taken.

The Board of Discipline (Board) noted that during the course of proceedings the complainant had made a request for withdrawal of the complaint. The Board also noted that the member had accepted his mistake with respect to non–communication with previous auditor in writing due to ignorance of the relevant provisions of C.A. Act. The Board held that although there was a technical flaw on the part of the member, yet considering the fact that the member had taken oral consent of the complainant, which fact was accepted by the complainant, and the complainant had made a request to withdraw the complaint, the benefit should be given to the member. On this ground it was held that the member was not guilty of professional or other misconduct.

(iii) Case of JCD.
(Reported on P.150 of Disciplinary cases published by ICAI VoL – II – BoD – Part II)

In this case the complainant firm was statutory auditors of the company for last 10 years. The complainant was also Tax Auditors of the company for all these years. For the year 2010-11 the complainant firm had completed Tax Audit and the same was not finalised because some points were pending compliance by the company. Since there was no compliance up to 25-09-2011, the complainant contacted the company when he was informed that the company had obtained the Tax Audit Report from another auditor. The complaint was that the member had accepted the Tax Audit assignment without prior communication with the complainant.

During the course of hearing before the Board, the complainant submitted that he had discussed the matter with the Member and as a good gesture, he wanted to withdraw the complaint. The Board noted that there was some miscommunication regarding the receipt of communication by the complainant from the Member which appears to have been sorted out. On this basis the Board held that the member was not guilty of professional or other misconduct.

2. Financial Report Review Board (FRRB)

In the publication of ICAI “Study on Compliance of Finance Reporting Requirements” following observations have been made by FRRB.

(i) Para 29 of AS-6 (Depreciation Accounting) (P.49)
In one case the accounting policy regarding depreciate was stated as under:

“In case of ‘X’ unit and ‘Y’ unit depreciation is calculated at straight line method and in all other units the WDV method has been followed.”

FRRB has referred to Para 29 of AS – 6 and observed that although the company has disclosed the depreciation methods adopted by it but the rates of useful life of such units are not disclosed. Being silent on this aspect cannot be construed that depreciation is charged at specified rates. Hence the above disclosure was not in accordance with the requirements of AS-6

(ii) Para 1 and 3.2 of AS-6 (P.50)
In the published accounts of some companies FRRB noticed that no depreciation on “Leasehold Land” was provided.

FRRB has taken the view, relying on Para 1 and 3.2 of AS-6, that Leasehold Land has limited useful life and, as such, it should be amortised as required by AS-6. In the above cases, this was not done and therefore the Depreciation Accounting was not in compliance with AS-6.

(iii) Para 28 of AS-6 (P.52)
In the case of a company, while accumulated depreciation for each class of assets was disclosed, the depreciation provided for the year against each item of asset has not been separately disclosed.

Referring to Para 28 (ii) of AS-6, FRRB has observed that under AS-6 “total depreciation for the period for each class of assets” should be disclosed. In this case, although accumulated depreciation was disclosed, no disclosure of depreciation for the year for each class of asset was not made. Thus the mandatory requirement of AS-6 was not complied with.

3. Applicability of Tax Rate in Quarterly Financial Results.

Facts:
A Central Public Sector Undertaking Company (Listed Company) is engaged in mining of bauxite, manufacturing of alumina and aluminium, generation of power in captive power plant for use in smelter plant and selling alumina and aluminium both in domestic and international market. Paid up share capital of the company is Rs.1,288.62 crore out of which 81.06% shares are held by the Government of India and 18.94% are held by the Public. As per the provisions of clause 41 of the Listing Agreement, the quarterly un-audited financial results are to be furnished to stock exchanges and be published in newspapers.

While computing the quarterly financial results, the company considers provision for tax expense by considering the computed taxable income upto that period based on the applicable tax rate for the said financial year.

The principles for recognition and measurement of tax expense are laid down in paragraph 29 (c) of AS 25 which states that the tax expense in each interim period is to be recognised based on the best estimate of the weighted average annual income tax rate expected for the full financial year.

As per the practice followed by the company consistently, at every quarter ending day, actual tax expense is provided based on the financials/ performance upto that period.

Query
In the above background, the Company has sought opinion of the EAC on the following issues:

(i) Whether the principles mentioned in AS 25, particularly, the principles for recognition and measurement of tax expense as laid down in paragraph 29(c) of AS 25 would apply to unaudited quarterly financial results prepared to comply with clause 41 of Listing agreement which are subject to limited review by the statutory auditors.

(ii) Whether the existing practice of recognising provision for tax expense by considering the computed taxable income for the relevant period based on applicable tax rate is in contravention of the provisions of AS 25.

EAC opinion:
After considering, clause 41(IV)(f) of the Listing Agreement and paragraphs 1, 2, 27 and 29 of aS 25, the Com- mittee noted that clause 41 of the Listing agreement specifically requires that quarterly and year to date results should be prepared in accordance with the recognition and measurement principles laid down in AS 25. The Committee also noted that the Guidance note on applicability of aS 25 to interim Financial results, issued by the ICAI does not lay down any new accounting principle and is only providing guidance on the application of a mandatory Standard (viz. AS 25). Therefore, the Committee is of the view that the company should follow the requirements of aS 25 as explained in the Guidance note and should apply the recognition and measurement requirements as contained in paragraph 29 (c) of AS 25 to the interim financial results presented under clause 41 of the Listing agreement. Thus, whether or not the Guidance note is binding or is recommendatory in nature is not relevant as the relevant requirements of the Standard are binding on the company. The Committee further noted that paragraph 29(c) of AS 25 requires that income tax expense should be recognised in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year.

The Committee also noted from the Facts of the case that while computing the quarterly financial results, the company considers provision for tax expense by considering the computed taxable income upto that period based on the applicable tax rate for the said financial year. On the basis of the above, the Committee is of the view that the accounting practice of the company to provide for tax expenses at the quarterly/interim period results based on the applicable tax rate for the said financial year would be correct provided such tax rate is the rate that would be applicable to the expected total annual earnings of the company for the whole year, that is, the estimated average annual effective income tax rate. In this regard, the Committee has pointed out that the tax expense for each interim period is not to be determined on the basis of average of estimated annual tax expense rather it is to be determined on the basis of estimated average annual effective income tax rate applied to the portion of income earned in the interim period. Thus, if in an interim period, there is a profit but in other interim periods, there are losses resulting into nil taxable income for the financial year, tax expense in each interim period will be provided for by applying estimated average annual effective income tax rate to the income (profit or loss) of those interim periods. In other words, if there are profits in the first quarter, the company has to provide tax liability in the first quarter at the appropriate estimated average annual effective income tax rate, which would get reversed in subsequent quarters if there are losses. For the purpose of calculating the estimated average annual effective income tax rate, guidance may also be taken from the Guidance note on measurement of income tax expense for interim Financial reporting in the Context of AS 25, issued by the ICAI.

The existing practice of recognising provision for tax expense by considering the computed taxable income for the relevant period based on applicable tax rate for the said financial year would be correct provided such tax rate is the rate applicable to the expected total annual earnings of the company for the whole year, that is the estimated average annual effective income tax rate.
[Pl. refer page nos. 1092 to 1095 of the C.A. journal – February, 2015]

4. ICAI News
(Note: Page Nos. given below are from CA Journal for February 2015

Group

no. of
candidates appeared

no. of
candidates Passed

Percentage
of Pass

Both

36,254

2,983

8.23

Gr. I

64,972

15,208

23.41

Gr. II

66,552

6,830

10.26

(i) November, 2014 Final examination results (P.1158)

First Rank : Vijendra Aggarwal, Gurgaon (69.75%)
Second Rank : Ms. Pooja R. Parekh,ahmedabad (69.50%)
Third Rank : Santosh P. Nankani, nandubar(69.13%)
Ms. nikita Goel, howrah (69.13%)

(ii) November, 2014 iPCC Examination

Group

no. of
candidates appeared

no. of
candidates Passed

Percentage
of Pass

Both

47,795

2,963

6.20

Gr. I

1,23,488

17,603

14.25

Gr. II

1,04,435

15,982

15.30

(iii) CPT Examination – december 2014 (P.1157)

Gender

appeared

Passed

Percentage

Male

63,541

9,060

14.26

Female

37,416

5,820

15.55

Total

1,00,957

14,880

14.74

(iv) late Shri rameshwarji Thakur

One of our former Presidents, Shri Rameshwarji Thakur, passed away on 15th january 2015 at the age of 86. He was our President in 1966-67. He was also a Freedom Fighter and an active member of our profession. He held the prestigious positions as union minister of State and later as Governor of madhya Pradesh, odisha, andhra Pradesh and Karnataka. We all condole his death and pay our respectful homage to the departed soul. We pray that the departed soul may rest in peace.

(v) New chapters of ICAI (P.1043)
Following new oversees chapters of iCai have been established in February, 2015.

(a)    24th Chapter at Vancouver (Canada)
(b)    25th Chapter at Bangkok (thailand)
(c)    26th Chapter at dar es Salam (tanzania)

(vi)    revision in rates of Stipend to Articled assistants:

By notification dated 23-01-2015 issued by ICAI the rates for stipend payable by Chartered accountants to their articled Assistants have been revised as under:-

normal Place of Service of
articled assistants

Stipend
payable p.m

First Year (`)

Second

Year (`)

remaining

Period (`)

(a)

Cities/Towns
with Population of above 20 Lacs

2,000

2,500

3,000

(b)

Population
be- tween 4 Lacs

and 20 Lacs

1,500

2,000

2,500

(c)

Population
below 4 Lacs

1,000

1,500

2,000

(vii) Our New President and Vice-President:

ICAI Council has elected Shri Manoj Fadnis (Indore) as President and Shri Devaraja Reddy M (Hyderabad) as Vice-President for the year 2015-16. Our greetings and best wishes to both for a successful term of office.

ICAI and its Members

1. Disciplinary Cases Disciplinary Committee (DC) of ICAI has decided the following cases and held the concerned members as guilty of professional or other misconduct. These cases are reported in the publication of ICAI “Disciplinary Cases” VOL-1. Page Nos. given below are from this Book. The names of members are not given in order to maintain confidentiality.

(i) Case of Mr. A.J.

In this Case, member has been held to be guilty of professional misconduct in respect of following four charges.

(a) Member accepted the position as auditor of NCP Ltd (Company) for 2006-07 without first communicating with the previous auditor in writing. In this case the member was appointed as auditor by the company on 01-10-2006. The member stated that he had informed the previous auditor about this fact by letter dated 14-08-2007 Under Certificate of Posting. This was considered by DC as not sufficient communication.

(b) The member accepted the appointment as auditor of the Company without first ascertaining from it whether the requirements of sections 224/225 of the Companies Act have been complied with. The DC found that the member could not establish whether these provisions were complied with.

(c) The member failed to exercise due diligence and was grossly negligent in the conduct of his professional duties while carrying out the Audit for 2006-07. The DC has noted that there were serious mistakes and grave irregularities in the Financial Statements audited by the member. The member could not produce his working papers to explain his view point.

(d) The member accepted the appointment as Auditor of the Company although payment of the undisputed audit fee of the previous auditor was outstanding. The DC has found that the undisputed audit fees payable to previous auditors were outstanding. No satisfactory evidence for payment of the outstanding fees was produced by the Member.

The D.C. has, after due consideration of the submissions of the Member, awarded punishment by way of removal of the name of the Member from the Register of Members for a period of one year. (DC- Pages 57-66).

(ii) Case of Mr.MKJ

In this case the complaint against the member was that he accepted Tax Audit assignment of a partnership firm without first communicating with the previous Tax Auditor. Further, the complainant (previous Tax Auditor) had stated that the member accepted the tax audit although his undisputed audit fees were outstanding.

The D.C. found that the member sent letter to the previous auditor Under Certificate of Posting. Although this was not sufficient compliance with the requirement for communication, the member could prove that the Postal Department had delivered the letter of communication to the previous auditor. Therefore, this charge was not proved.

However, the D.C. has held that the member was aware of the fact that undisputed audit fees of the previous auditor was outstanding and no satisfactory evidence were produced as to why this was not paid. Therefore, on this count the member was held to be guilty of professional misconduct.

The D.C. has issued a letter of caution to the member advising him to be more careful in future in complying with the provisions of C.A. Act and Code of Ethics. ( DC Pages 74 – 81).

(iii) Case of Mr.S.A.

In this case, the member was found guilty of professional misconduct in respect of the following charges.

(a) The member accepted position as Auditor of Six Entities without communicating with the previous auditor in writing. The defence of the member was that he had verbally communicated with previous auditor and no objection was raised. This was not accepted as proper communication by D.C.

(b) The second charge was that the member accepted the audit of six entities although audit fees and other fees for Tax consultation due to previous auditor was outstanding. The member could not produce any evidence for the payment of outstanding fees. The D.C. held that the member was not required to ensure payment of fees for Tax consultation but as regards outstanding Audit Fees due to the outgoing auditor no effort was made to clear the same.

The D.C. held the member guilty on both counts and awarded the punishment of Reprimand to the Member.

2. Some Ethical Issues

The Ethical Standards Board of ICAI has given answers to some Ethical Issues as under on Pages 1008 – 1010 of the CA Journal for January, 2014.

(i) Issue No: 1:

Appointment of another Auditor at Adjourned A.G.M without Special Notice.

If any annual general meeting is adjourned without appointing an auditor, no special notice for removal or replacement of the retiring auditor received after the adjournment can be taken note of and acted upon by the company. In terms of section 190(1) of the Companies Act, 1956, special notice should be given to the Company at least fourteen clear days before the meeting in which the subject matter of the notice is to be considered. The meeting contemplated in section 190(1) undoubtedly is the original meeting.

(ii) Issue No: 2:

Charge of Fees by C.A in practice based on percentage of Turnover.

In terms of Clause (10) of Part I of First Schedule to the C.A. Act, it is not permitted for a Chartered Accountant or a firm of Chartered Accountants to charge fees on a percentage of turnover, except in the circumstances provided under Regulation 192 of the CA Regulations, 1988.

(iii) Issue No:3:

Whether a member in practice can be a director of company?

A member in practice is permitted generally to be a Director simpliciter in a Company provided he is not a Managing Director or Wholetime Director and is required to attend only the Board Meetings of the company and not paid any remuneration except sitting fees for attending the meetings.

(iv) Issue No: 4:

Whether a Chartered Accountant in practice is entitled to accept teaching assignment?

A Chartered Accountant in practice is allowed to accept teaching assignment in university, affiliated colleges, educational institution, coaching organisation, private tutorship, provided the direct teaching hours devoted to such activities taken together do not exceed 25 hours a week.

(v) Issue No: 5:

Undercutting Fees:

It is now possible for a C.A. in practice to accept a position as Auditor previously held by some other C.A. in such conditions as to constitute undercutting.

3. Rotation of Auditors:

ICAI had successfully objected to the introduction of the system of Rotation of Auditors for the last over six decades. Several Commissions and Parliamentary Committees had agreed that rotation of Auditors was not in the interest of the Accounting Profession as also for the Corporate Sector. Inspite of this, provision for rotation of auditors has now been introduced by enactment of new section 139 of the Companies Act, 2013.

Detailed procedure for Rotation of Auditors as contained in section 139 has been stated in November, 2013 (Page 107), issue of B.C.A. Journal. Briefly stated, a firm of Chartered Accountants cannot continue as auditor of listed companies and other specified companies for more than 10 years. This period for sole proprietary concern is five years. After the expiry of this period, the same audit firm or its associate cannot be reappointed for a period of 5 years.

As stated earlier, the system of Rotation of Auditors u/s. 139 is to be applied only in Cases of Listed Companies and other Companies as may be prescribed by Rules. It may be noted that Draft Rule 10.3 provides that this system of Rotation of Auditors will apply to all Public and Private Companies, other than Small Companies and One-Person Companies. This provision is very harsh and almost of all Small and Medium sized Audit Firms will lose their medium sized Audit Clients. If a reference is made to section 149(4) it will be noticed that the requirement for appointment of Independent Directors on the Board of Companies applies to Listed Companies and other companies as notified by Rules. Draft Rule 11.2 provides that this requirement will apply to any Public Company having (i) paid-up capital of Rs.100 cr. or more, or (ii) Turnover of Rs. 300 crore or more or (iii) Aggregate Loans, Deposits etc. exceed Rs. 200 crore. There are similar other sections where similar powers are given to the government and the Draft Rules have equated Listed Companies with large Public Companies. ICAI should suggest that Draft Rule 10.3 should provide that the system of Rotation of Auditors should apply, besides listed Companies, to only large Public Companies having paid up capital exceeding Rs. 100 crore or so.

The Draft Rule 10.4(4)(i) is the most damaging rule in as much as it provides that for the purpose of rotation the period for which the auditor is holding office as auditor prior to commencement of the New Act shall be taken into account for calculating the period of 5 or 10 years. If this is implemented the existing small and medium sized Audit Firms will lose almost all their Audit Clients. They will cease to be auditors in almost all the companies where they have been auditors for 5 or 10 years during the next 3 years. This will put their Audit Staff, Articled Assistants and others in the most precarious position. Most of these firms will have to close down their Audit Practice. In some cases such firms will have to adopt unhealthy practice of canvassing for audit work. ICAI should strongly represent for amendment of this Draft Rule 10.4 (4) (i) so that it is specifically provided that period prior to enactment of section 139 is not counted for the limit of 5 or 10 years for reappointment of statutory auditors. It may be noted that Explanation below section 149
(11) dealing with Independent Directors who can hold office for 10 years specifically provides that the period prior to enactment of the section is not to be considered for counting the period of 10 years.

4. EAC Opinion:

Recognition of Distribution Network Acquired in a Business Acquisition as an Intangible Assets

Facts:

Company X (Company) was incorporated in February, 2011 as a wholly owned subsidiary of company Y. During the year 1st April, 2011 to 31st March, 2012, the company X acquired a business from company Z, an unrelated party, on a slump sale basis for an arm’s length consideration. Company Z is a leading manufacturer of kitchen appliances. The acquisition of business has led to company X becoming a leading player in this segment. As part of the acquisition, company X has acquired a large network of distributors, service centres, service points, retailers and manufacturing points.

The company operates through different channels, such as, the distributors, retailers, direct dealers, etc. More than 80% of the sales in the past were effected through the network of distributors (The distribution network).

The management of company X engaged a valuer to carry out the purchase price allocation. The intangible assets identified by the valuer for the purchase price allocation included brands and the distribution network. As per the valuation report, the distribution network was identified as an intangible asset and considering the time period over which the current distribution network was expected to contribute to the revenue of company X, the economic life of the distribution network was considered to be indefinite. However, the agreement appointing the distributor was valid till 31st March, 2012 and was renewable on mutual terms.

Query:

The querist has sought the opinion of the Expert Advisory Committee as to whether the distribution network acquired as part of the business acquisition in the case of the Company qualifies for recognition as an intangible asset as per AS 26.

EAC Opinion:

After considering paragraphs 6.1, 6.2 and 31(a) of AS 26 the Committee is of the view that for recognition, an intangible asset, even if acquired as part of a business purchase, should meet both the definition and recognition criteria specified in AS 26. The Committee notes from the Facts of the Case that the distribution network, being an arrangement for the marketing of the company’s product, is a non-monetary item without physical substance held for the purpose of supply of goods. Further, it appears from the Facts of the Case, that the existence of the distribution network is a factor for the acquisition of the business. So, while allocating the purchase consideration the valuer is able to identify the distribution network separately and also assign a value to it. This indicates that (i) the distribution network is identifiable; (ii) it is probable that future economic benefits attributable to the distribution network will flow to the company; and (iii) the cost of acquisition of the distribution network can be measured reliably.

Further, considering paragraphs 16 and 17 of AS 26 the Committee is of the view that the key terms of the distribution agreement mentioned by the querist indicate that the distribution network is controlled by the company at the time when it acquires the business, but the distribution agreement is valid only upto 31st March,2012 and the exchange (market) transactions for the same or similar distribution network are not available. In other words, there does not appear to be any control on distribution network either through legally enforceable rights or in any other way beyond 31st March,2012.

Hence, distribution network acquired as part of the business acquisition in the Company’s case qualifies for recognition as an intangible asset as per AS 26 only upto 31st March,2012.

[Refer page nos. 1038 – 1044 of C. A. Journal – January, 2014]

5. ICAI news:

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

(i) Empanelment of CA Firms on C& A.G. Panel for the year 2014-15

Applications are invited online from the firms of Chartered Accountants who intend to be empanelled with the office of C & A.G. for appointment as auditors of Government Companies/Corporations for the year 2014-15. The format of application will be available on the website www.saiinida.gov.in from 1st January, 2014 to 15th February, 2014. (P. 1118)

Campus Placement Programme – February – March, 2014

The Committee for Members in Industry of the ICAI is organising Campus Placement Programme for newly qualified Chartered Accountants at various centers all over India. Campus Placement Programme will be organised at various centres viz. Ahmedabad, Bangalore, Bhubaneswar, Chandigarh, Chennai, Coimbatore, Ernakulam, Hyderabad, Indore, Jaipur, Kanpur, Kolkata, Mumbai, Nagpur, New Delhi and Pune from 17th February, 2014 to 15th March, 2014. (For details refer Page 1122)

ICAI and its members

Disciplinary Cases:
The Disciplinary Committee (DC) of the ICAI has decided on some cases about professional or other misconduct. These are reported in the publication “Disciplinary Cases” Vol -1. The page numbers given below are from this book. The names of the members are not given, in order to maintain confidentiality.

(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.

ICAI and its members

1. Disciplinary Cases Disciplinary Committee (DC) of ICAI has decided the following cases which are reported in ICAI publication viz., “Disciplinary Cases” Vol. I Part – I and II

(i) Case of G.K.

In this case, Mr. G.K. used to audit the accounts of certain group companies and give statutory audit reports from 01-10-2005 to 26-09-2009. He did not reveal to the company management that his name was removed from Register of Members maintained by ICAI. It was further alleged that he had connived with one of the Directors of the company to defraud the other Directors.

The D.C. found that the name of Mr. G. K. was removed from the Register of Members for non payment of Fees and therefore he was not entitled to audit or give statutory audit reports. Therefore, Mr. G.K. had contravened the provisions of sections 8 and 24 of the C.A. Act. Section 24 provides for prosecution of such person and court can levy fine upto Rs. 5,000/- and under certain circumstances award punishment by way of imprisonment upto 6 months.

However, under the present proceeding, Mr. G.K. was held to have committed other misconduct under Clause (2) of Part IV of First Schedule and Clause (1) of part II of second schedule of C.A. Act on the first charge. As regards the second charge the D.C. held that this was not proved. The D.C. awarded punishment of removal of the name of Mr. G.K. from membership for 3 months (Reported on Pages 20 – 27 of Part I of Vol.I)

(ii) Case of V.K.

In this case, the member advised his client that capital gains tax of Rs. 6.91 lakh was payable as Advance Tax for A.Y. 2007-08. The member undertook to deposit Advance Tax on behalf of his client. The client paid Rs. 6.91 lakh to the member who deposited the cheque in his account. The member deposited only Rs. 0.91 lakh as Advance tax on behalf of his client. He, however, added the figure of Rs. 6 lakh in the Bank Challan to defraud the I.T. Dept. In other words, the member had misappropriated Rs. 6 lakh and cheated his client. When this fact came to the knowledge of his client, the member refunded the amount to his client with interest. He has also paid interest charged by the I.T. Dept.

The D.C. has found the member guilty of professional misconduct under Clause (10) of part I of second schedule of C.A. Act. The D.C. has held that amount collected from client for payment of Advance Tax was used by the member for his personal purpose in violation of the above clause. The fact that the member has returned the amount with interest can not absolve the member from his guilt.

On the consideration of the facts of this case, the D.C. has awarded punishment to the member and directed that his name be removed from the Register of Members for a period of 2 years. Further, the D.C. has imposed a fine of Rs. 50,000/- to be deposited within 90 days. (Reported on pages 28 – 36 of Part I of Vol.1).

(iii) Case of Mr. V. K. D.

In this case, the Reserve Bank of India (RBI) reported to ICAI that the member (Statutory Auditor of NBFC Company) has submitted a certificate on 12-04-2007 stating that the company continues to undertake the business of NBFC requiring it to hold the certificate of registration u/s. 45-IA of the RBI Act. The RBI has stated that according to company’s letter dated 26- 03-2007 it had informed RBI that it had yet to start the commercial business. Hence, according RBI the Certificate of the Member was wrong. The charge against the Member was about gross negligence under Clause (7) of Part I of second schedule of CA Act.

The defence of the member was that he issued the certificate dated 12-04-2007 in response to the request letter from Company, whereby, he was requested to certify whether the company continues to carry on principal business of NBFC as on 31-03-2007. As per RBI press release No. 1998-99/1269 dated 08-04-1999, the Company’s financial assets should be more than 50% of its total assets and income from financial assets should be more than 50% of gross income. Both these tests are required to be satisfied as the determinant factor. It may be appreciated that the Respondent was not required or intended to verify and certify generally whether the Company has commenced the commercial business of which Respondent denies any knowledge or involvement.

The D.C., after hearing the Member and after verifying the documents produced by him, held that the company was meeting with criteria of NBFC as prescribed by RBI. It was also noted that the company was a private company and did not require to obtain business commencement certificate. Therefore, when the criteria of investment in Financial Assets and income from such assets was met and the Member gave the certificate keeping in mind the going concern concept. No mala fide intention was established. Therefore, giving benefit of doubt to the member, it was held that he was not guilty of professional misconduct. (Reported on Pages 6-12 of Part II of VoL-1).

2. Some Ethical Issues

The Ethical Standards Board of ICAI has given answers to some Ethical Issues. These are published on Pages 1171 – 1172 of CA Journal for February, 2014.

(i) Issue No.1

Whether an auditor is required to provide to the client or to main auditor of the Head Office of the same enterprise access to his audit working papers?

Working papers are the property of an auditor. An auditor is not required to provide the client access to his audit working papers. The main auditors of an enterprise do not have right of access to the audit working papers of the branch auditors, except in case it is required by the Regulatory norms.

(ii) Issue No.2

Whether Joint Auditors can demand the working papers of one another?

The working papers are the property of an auditor. Therefore, no joint Auditors can demand the working papers of the other Joint auditor.

(iii) Issue No.3

Whether a joint auditor will be responsible for the work done by other joint auditor?

Council direction under Clause (2) of Part 1 of the Second Schedule to the C.A. Act prescribes that in respect of audit work divided among the joint auditors, each joint auditor is responsible only for the work allocated to him, whether or not he has prepared a separate report on the work performed by him. However, on the other hand, all the joint auditors are jointly and severely responsible for the work which is not inter se divided among the auditors.

(iv) Issue No.4

Whether the statutory auditor can accept the system audit of same entity?

The statutory auditor can accept the assignment of a system audit of the same entity, provided it did not involve any scrutiny/review of financial data and information.

3. EAC Opinion:

Treatment of Mark to Market Losses on Principal only Currency Swap:

Facts:

A company is engaged in providing port and related infrastructure services (including SEZ) to various port and SEZ users.

The company has stated that when it approaches banks for long term loans to fund the capital expenditure for port project, it has the option of seeking a foreign currency loan (FCL) or a Rupee loan. In case FCL is not readily available, the company agrees to borrow Rupee loan. The sanction letter of bank could also provide the company the option to convert the undrawn portion of Rupee loan into FCL at a later date. Further, along with the sanction of Rupee loan, banks also sanction derivative limits so that the company could utilise the same for swapping drawn and outstanding Rupee loan amount into foreign currency facility. According to the company, it enters into derivative transaction by way of Principal Only Swap (POS) to the extent of outstanding Rupee loan in its balance sheet. As per the company, though POS transaction is an off balance sheet item, the same cannot be entered into unless there is an underlying outstanding loan in the balance sheet. Hence, it is clearly inter-linked to a balance sheet item.

The company has further stated that POS transaction with bank involves notional swap of the company’s Rupee loan with USD. As a result, the company has USD exposure through POS. The tenor of underlying Rupee loan of POS contract is same and notionally, the company swaps the Rupee loan with the USD loans. The bank which enters into the POS actually buys Rupee from the company and sells it USD. However, no cash flow takes place, no entries are passed in books and details of outstanding transaction are disclosed in the financial statements. Thus, effectively, what was a Rupee obligation of the company becomes a USD obligation with the POS.

According to the company, all POSs are monitored on a regular basis and, periodically, the company has interest inflow on account of differential interest rate on Rupee and USD borrowings. As per RBI directives, POS contracts are cancellable but once cancelled, cannot be renewed during tenure of the term loan and, hence, it is possible to have POS till the maturity of Rupee loan.

The company has also stated that for such transactions, bank pays Rupee interest rate of, say 11% and the company pays USD interest rate of, say, 5%. The difference is called ‘carry’. This means that if Rupee interest rate goes below 11% the company gets benefited as ‘carry’ remains same and vice versa, but the company has exposure on account of variation in INR/USD exchange rate. Effect of USD increase is still exchange rate difference and is still to be accounted for by way of Mark to Market (MTM) loss/gain. But, this is, again, only a memorandum (notional), because, just as the exchange rate differences on External Commercial Borrowings (ECBs), this also does not actually materialise till the loan is actually paid off.

The question arises about accounting for MTM losses/gains on such POS transaction along with receipt of ‘carry’ income at regular intervals in accordance with the Ministry of Corporate Affairs (MCA). Notification dated 7th December, 2006 and subsequent extension vide Notifications dated 31st March, 2009 and 29TH December, 2011.

Query:

On these facts, the company has sought the opinion of the Expert Advisory Committee as to whether the mark to market losses on POS can be treated as exchange rate difference and, accordingly, can be recognised as per paragraphs 46 and 46A of AS11, notified by the Central Government.

EAC Opinion:

The Committee is of the view that the issue raised by the Company requires examination from two angles – firstly, whether the Rupee loan taken by the company becomes a foreign currency liability by the existence of POS transaction or whether it should, in substance, be treated as a foreign currency loan by the existence of POS transaction and, secondly, whether the POS transaction can be considered to be a foreign currency transaction within the scope of AS11.

A reading of AS11 indicatesthataccountingtreatment for only those forward exchange contracts which are entered into for hedging foreign currency risk where the underlying transaction is denominated in a foreign currency, or for trading or speculation purpose. The Committee notes from the Facts of the Case that the underlying transaction is a Rupee loan that does not give rise to any foreign currency risk. It is the POS transaction in the Company’s case that exposes the company to foreign currency risk rather than mitigating the same. Thus, the purpose of the POS is not hedging any foreign currency risk. The POS is not held for trading because the company is not a trader in foreign exchange. There may be speculation, if there is no underling transaction or if there is an underlying transaction but the intention is to speculate the movement in foreign exchange rate and to cancel the POS for booking profit at the opportune time. In the Company’s case, the POS has an underlying transaction viz., Rupee loan. But, the company’s intention is not to speculate the movement in foreign exchange rate and to cancel the POS at the opportune time for profit booking. This basic purpose of the POS transaction in the Company’s case is to take advantage of the difference between Rupee interest rate and USD interest rate. Its purpose is saving in interest cost though it exposes the company to foreign risk. The mere fact that the company might have considered likely foreign exchange loss in making the decision to enter into the POS transaction, in itself, does not make the POS as held for speculation purposes. Thus, the POS is not held for hedging any foreign currency risk or trading or speculation purposes. Hence, the POS is not a forward exchange contract within the scope of AS11 and therefore, is not a foreign currency transaction within the scope of AS 11,

Examination

Group I

Group II

Both Groups

(a) FINAL

Appeared

Passed

Appeared

Passed

Appeared

Passed

Nov.2013

51728

2932

5.67

54,786

4,026

7.35

32536

1013

3.11

May 2013

45822

6319

13.79

50,354

9,389

18.65

27,556

2764

10.3

Nov.2012

48320

13193

27.30

51,906

11,341

21.85

29,339

3804

12.9

(b) IPCC

Nov 2013

122253

23,342

19.09

117834

21076

17.88

62033

5038

8.12

May 2013

124310

24,161

19.44

112465

16675

14.83

70504

8428

11.73

Nov.2012

100494

25269

25.14

96,181

20326

21.13

52531

5835

11.15

4. ICAI News

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

(i) Extension of Last date for complying with CPE Hours

ICAI has notified that the last date for complying with requirement of CPE hours for the Block Period of 2011-2013 has been extended from 31-12-2013 to 31-03-2014 (ICAI Website).

(ii) C A Examination Results

The Results of CA examination which have been recently declared are very strict. This will be noticed from the following comparative figures. (ICAI Website).

(iii) New Branches of ICAI

Following New Branches of ICAI have been opened on 3rd January, 2014 (P.1280-1282).

(a)    Dibrugah (EIRC)
(b)    Tinsukia (EIRC)
(c)    Karimnagar (SIRC)
(d)    Warangal (SIRC)
(e)    Ongole (SIRC)

(iv) Get CA Journal on Mobile

CA Journal will be available on ios (I pad/I Phone etc) and Android Devices from 01-03-2013 (Refer P.1279).

ICAI News

Placement Programme of ICAI

ICAI had organised placement programme for new Members in the months of February and March, 2014. Details are given on P. 1561 – 1562. Some factures are as under.

• No. of candidates interviewed 2,327

• No. of organisations participated 80

• No. of Interview Teams 136

• No. of Jobs offered 717- Accepted 681

• Highest Salary offered – Domestic posting Rs. 21 lakh P.A. and for International posting Rs. 20.25 lakh P.A

• Average CTC offered Rs. 7.30 lakh P.A. (ii) ICAI Publications (a) Compendium of opinion Vol. XXXII (12-02-2012 to 11-02-2013) (b) Study on Compliance of Financial Reporting Requirements (Vol – II) ( P. 1578 – 1579).

Rotation of Auditors

In February, 2014, the Journal of BCAS (P.631) the issue relating of Rotation of Auditors was discussed. It may be noted that section 139 of the Companies Act, 2013, has now come into force w.e.f. 01-04-2014. This section provides for rotation of auditors. In the case of a CA firm, the maximum period is fixed as 10 years and in the case of an Individual the period is 5 years with rest period of 5 years for audit of a company to which the section applies.

The Ministry of Corporate Affairs has now notified Companies (Audit and Auditors) Rules, 2014. These Rules have come into force on 01-0402014. Rule 5 provides that the provision for Rotation of Auditors u/s. 139 will apply to only(a) Listed Companies, (b) Unlisted Companies having paid up Share capital of Rs. 10 crore, (c) Private Companies having paid share capital of Rs. 20 crore and (d) Any Public or Private Company, not covered by (a) (b) or (c) above, which has public borrowings from financial institutions, banks or public deposits of Rs. 50 crore or more.

Rule 6 states that the period for which the auditor has held office as an auditor prior to the commencement of the Act (i.e., 01-04-2014) should be taken into account for calculating the period of 5 consecutive years (For the individuals) or 10 consecutive years (For the firm). This will mean that if a CA Firm is an auditor of a company to which the section applies for 10 years or more prior to 01-04-2014, that firm can continue as auditor of that company for grace period of 3 years only. This Rule gives a chart explaining the years for which the auditor can continue as an auditor of the specified company after 01-04-2014.

EAC Opinion

The accounting for Expenditure on Shared Infrastructure Facilities and Depreciation thereon:

Facts:

A company, during the year 1984-85, was engaged in the construction and operation of the thermal power plant in the State of Odisha. The company had set up two power plants. (Units I and II e.g., Stage 1) as its maiden venture in the district of Jharsuguda known as IB Thermal Power Station and the Units were commercially operated during December, 1994 and June, 1996 respectively. The company is setting up two new power plants (Units III and IV, i.e., Stage 2) at the same location. The company has stated that the power generated from Units I and II is sold to ABC Ltd., a Government of Odisha Undertaking, at a tariff determined as per bulk Power Purchase Agreement (PPA) executed during the year 1996. The company has further stated that for setting up new power plant Units III and IV (new power plant), total estimated capital cost will be met out of 75% long term loans and 25% as equity from the investors. 50% of the power generated from the new power plant is to be sold to ABC Ltd., and balance 50% of power is to be sold to different power purchasers on long term and short term basis. The new power plant will share some of the existing infrastructure facilities originally constructed for Units I and II which are under direct control of the company. The infrastructure facilities will require substantial capital expenditure for renovation, improvement and addition to make them usable in support of construction of the new power plant. Without the above proposed expenditure, the infrastructure facilities may not support the construction of Stage 2.

Query:

In view of the above facts and accounting requirements, the company has sought the opinion of the EAC as to whether the accounting method of additional expenditure incurred for shared infrastructure facilities and calculation of depreciation separately for charging to operation for Stage 1 and expenditure during construction for capitalisation for Stage 2 as well as inclusion in the capital cost of Stage 2 is in consonance with the generally accepted accounting principles and Accounting Standards followed in India.

EAC Opinion:

After considering paragraph 23 of the 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 and betterments. 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 /renovation of such asset without actually improving the previously estimated standard of performance is also expensed. Expenditures that add new fixed asset units, or that have the effect of improving the previously assessed standard of performance are capitalised.

The Committee notes from the facts of the case that the capital expenditure is being incurred on existing infrastructure facilities which will support the construction as well as operation of new power plant. Further, the expenditure shall increase the future benefits from the existing asset beyond its previously assessed standard of performance and such asset will be used beyond the original useful life assessed for existing power plants. Accordingly, such additional expenditure incurred on common infrastructure facilities for new power plant can be capitalized.

Further, after considering paragraphs 12.2 of AS 10 and paragraphs 9, 23 & 24 of AS 6, the Committee is of the view that it is only an addition or extension which retains a separate identity and is capable of being used after the existing asset is dispose off, is accounted for and depreciated independently on the basis of an estimate of its useful life. However, in the company’s case, such expenditure is not creating any new asset which is separately identifiable but such asset will be used beyond useful life assessed for existing power plant. Accordingly, it should be capitalised with the cost of existing assets.

As regards the inclusion of the depreciation charged on the asset used in the construction activities of the new power plant in the cost of asset(s) capitalised, the Committee is of the view that to the extant the asset is being used for construction activity, depreciation on the asset is a directly attributable cost of bringing the asset to its working condition for its intended use and accordingly, as per paragraph 9.1 of AS 10, it should be capitalised with the cost of asset(s) as per AS 10.

Therefore, the Committee is of the opinion that the accounting treatment of the expenditure incurred on infrastructure facilities and calculation of depreciation separately for charging to the operation for the existing units and expenditure during construction for capitalisation for the new power plant as well as inclusion in the capital cost of new power plant is not inconsonance with the generally accepted accounting principals and Accounting Standards followed in India.

Some Ethical Issues

The Ethical Standards Board of the ICAI has given answers to some Ethical Issues on Pages 1462 to 1464 of the C.A. Journal for April, 2014. Some of these issues are as under:

(i) Issue No.1

Whether the statutory auditors consisting of ten or more members can conduct the branch audits of the same company?

The Council has prescribed certain self regulatory measures in order to ensure a healthy growth of the profession and an equitable flow of professional work among the members. One of the recommendations of this nature is that the branch audits of a company should not be conducted by its statutory auditors consisting of 10 or more members, but should be conducted by the local firms of auditors consisting of less than ten members. This should not be understood to mean any restriction on the right of the statutory auditors to have access over branch accounts conferred under the Companies Act, 1956. This restriction may not apply in the following cases:

(a) where the accounting records of the branches are maintained at the head office of the respective companies; and

(b) where significant operations of an undertaking or a company are carried out at its branch office.

(ii) Issue No.2

What should be the size of signboard for the office?

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. The 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 Chartered Accountant, provided it is a name plate or name board of an individual member and not of the firm.

(iii) Issue No.3

Can a member share profits with the widow of his deceased partner?

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