FINANCIAL STATEMENTS ( Schedule III update)

Transcription

1 FINANCIAL STATEMENTS ( Schedule III update) M P Vijay Kumar 1 M P Vijay Kumar

2 Disclaimer This part of the presentation should only be read along with the text of AS. The views expressed are those of the presenter and, therefore, do not necessarily represent the views of either the Council or any Committee(s)/Board(s) of the Council of the Institute of Chartered Accountants of India (ICAI). 2 M P Vijay Kumar

3 Agenda Part 1 : Disclosures relating to SBN in Schedule III Auditors Responsibilities Part 2 : Common mistakes in FS 3 M P Vijay Kumar

4 DISCLOSURE OF SPECIFIED BANK NOTES IN SCHEDULE III 4 M P Vijay Kumar

5 Background 1. On 8 November 2016, GOI announced the demonetisation of all 500 and 1, In this context, MCA vide notification dated 30 th March 2017 amended Schedule III requiring every company to disclose the details of SBN held and transacted during said period. 3. MCA inserted a new Rule 11(d) of Companies (Audit and Auditors) Rules, 2014 requiring auditors to report on disclosures in financial statements relating to SBN from 8 th November, 2016 to 30 th December, SBN means bank notes of denominations of the existing series of the value of five hundred rupees and one thousand rupees as per S.O. 3407(E), dated 8 th November, M P Vijay Kumar

6 MCA - Notification 1. Notification clearly states that it comes into effect from 30 th March 2016 and includes the period from 8 th November 2016 to 30 th December Notification seeks disclosure of closing cash in hand as on 8 th November 2016 and as on 30 th December 2016 and movement in cash in INR between two dates with the following details a. Permitted receipts b. Permitted payments c. Amount deposited in Banks 3. This is applicable to disclosure and reporting on both stand-alone FS and CFS 6 M P Vijay Kumar

7 ICAI - FAQ Applicability of the Amendment to Schedule III The disclosure is applicable to FS issued after 30 th March 2017 for the transactions from 8 th November 2016 to 30 th December Audit report issued for the above FS should include comment as per Rule 11(d) Scenario for modifying the main audit report Instance of non-compliance with said notifications noted by the auditor and where in the auditor s professional judgment it is concluded that the non compliance is of such nature that it has an impact on the true and fair view of the FS, the auditor should consider modifying his report in accordance with SA 705, Modifications to the Opinion in the Independent Auditor s Report. 7 M P Vijay Kumar

8 Illustrative Audit procedures 1/3 Closing cash balance certificate with denominations as at 8 th November 2016 and as at 30th December 2016 in respect of SBN and other denomination notes. Understanding of the controls and procedures implemented by the company during the period 9 th November 2016 to 30 th December 2016 to ensure no payments and receipts made in SBN other than those permitted by regulators from time to time. Existence of controls to prevent and detect any non-permitted transactions. Confirmation of balances by the Management from the books of accounts as on those dates. In case of any physical verification conduction on 8 th November 2016 or 30 th December or a closer date (for example 31 st December 2016), performing roll-forward or roll-back procedures to confirm the balance as certified by the Management. A listing from the Management for any receipts of the SBNs during the said period, including the nature of transaction and amount with denominations. 8 M P Vijay Kumar

9 Illustrative Audit procedures -2/3 A listing from the Management as to how the SBNs available as on 8 th November 2016 were dealt with, example. Used for payment for permitted transactions. [Verify cash payment vouchers to check if payments were made are covered ] Deposited in bank accounts as evident from bank deposit slips/bank statements. Bank Statements to be collected as evidence. Used for Payment for non-permitted transactions. [The same should be reported] SBNs as available with the company as at closing hours of 30 th December, For entity eligible to receive SBN (e.g. hospital, toll-collection companies, petrol pumps, air ticket) details of receipts and deposits made with the Bank. Management representation for the following: Completeness of the disclosure made in the notes to the financial statements. Manner of dealing in the SBNs during 9th November 2016 to 30th December 2016, deposited in bank, payment against permitted transactions etc. Permitted receipts and permitted payments made by the company as per the Government notifications issued from time to time. 9 M P Vijay Kumar

10 Illustrative Audit procedures -3/3 The Illustrative reconciliation to be obtained from management is as follows for the cash movement 10 M P Vijay Kumar

11 Reporting Scenarios: 1-3/6 The company has provided requisite details. Auditor is able to report on the same. The Company has provided requisite disclosures in the financial statements regarding the SBN. Based on audit procedures and relying on the management representation, we report that the disclosures are in accordance with the books of account maintained by the company and as produced to us by the Management Clause is not applicable to the company The Company did not have any holdings or dealings in SBN during the said period OR In case of say Banking companies ( to whom Schedule III is NA ), to state that the notification is not applicable to the Company. The company has provided requisite details. Auditor is not able to verify The Company has provided requisite disclosures in the financial statements regarding the SBN. However, we are unable to obtain SAAE for the purpose of verification 11 M P Vijay Kumar

12 Reporting Scenarios: 4-6/6 Company has not provided REQUISITE disclosures in the FS as to holding and dealing in SBN The Company has not provided requisite disclosures in the FS as to holdings and dealings Company has not provided CERTAIN requisite disclosures in the FS as to holding and dealing in SBN Company has provided details but have transacted in nonpermitted transactions The Company has not provided CERTAIN requisite disclosures in the FS as to holdings and dealings Consequently, we are unable to obtain SAAE to report whether the disclosures to the extent states in notes are in accordance with the books of account maintained by company and provided to us by the Management. The Company has provided requisite disclosures in the FS However, as stated in notes amounts aggregating have been utilized for other than permitted transactions 12 M P Vijay Kumar

13 Management Representation We have appropriately disclosed (refer note.), the details of SBN, held and transacted during the period 8 th Nov 16 to 30 th Dec 16 pursuant to notification. 30 th March 17 Further, we confirm that we have complied with all the relevant guidelines/ notifications issued by RBI from time to time in respect of holding and dealing with SBN, and that the company had proper controls, systems and procedures in place for such compliance 13 M P Vijay Kumar

14 Common Non-Compliances of Accounting Standards in Preparation of Financial Statements (lllustrative LIST FOR DISCUSSION) 14 M P Vijay Kumar

15 Index Accounting Standard Slide No. AS 2: Valuation Of Inventories AS 3: Cash Flow Statement AS 4: Contingencies and events occurring after the Balance Sheet date AS 5: Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies AS 6: Depreciation AS 7: Construction Contracts AS 9: Revenue Recognition AS 10: Accounting For Fixed Assets AS 11: The Effects of Changes in Foreign Exchange Rates AS 13: Accounting For Investments AS 15: Employee Benefits AS 16: Borrowing Cost AS 17: Segmental Reporting M P Vijay Kumar

16 Index Accounting Standard Slide No. AS 18: Related Party Disclosures AS 19: Leases AS 20: Earnings Per Share AS 22: Accounting for Taxes on Income AS 23: Accounting for Investments in Associates in CFS AS 24: Discontinuing Operations AS 26: Intangible Assets AS 27: Financial Reporting of Interests in Joint Ventures AS 28: Impairment of Assets M P Vijay Kumar

17 AS 2 Valuation of Inventories Common Non-Compliances 17 M P Vijay Kumar

18 #1 : Valuation Principle Facts of the case Related AS treatment Impact/Remarks Different companies adopt different accounting policies with regard to valuation of inventories. As per Para 5 of AS 2. Inventories should be valued at the lower of cost and net realizable value. Non compliance of principle Non usage of word Net in Net Realizable Value while defining the policy on valuation of inventory. As per Para 3.2 Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. This gives an impression that the related costs are not reduced from the value of inventory. 18 M P Vijay Kumar

19 #1 : Valuation Principle Facts of the case Related AS treatment Impact/Remarks Taking Average Cost as the Cost formula for determining and stating the value of inventory in the Financial Statements. Accounting policy of a construction company states that Constructed buildings and related equipment are valued at cost less depreciation. AS 2 permits two methods for the calculation of cost of inventory i) FIFO method ii) Weighted Average Cost method As per Para 5 of AS 2 Inventories should be valued at the lower of cost and net realizable value. As per Para 3.2 of AS 2 Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. Not permitted. Violation of AS-2 Auditor to qualify For construction company, unsold buildings to be sold, are inventory Inventory has to be valued after considering NRV. Depreciation cannot be construed as providing the value of estimated costs of completion and the estimated costs necessary to make the sale. 19 M P Vijay Kumar

20 #1 : Valuation Principle Facts of the case Related AS treatment Impact/Remarks The accounting policy states Custom Duty payable on raw material, stores and spares and machinery are accounted for on clearing of the goods from Custom Warehouse. Non - creation of a provision for ED on the goods manufactured during the year and lyinginthe warehouse Customs duty is a cost incurred in bringing the goods to its present location and condition, i.e., importing the goods and the liability to pay this duty arises as soon as the goods enter theterritorial waters of thecountry. ED is cost incurred when the manufactured good leaves the factory premises. GN on ED- ED be included in the cost of closing stock that is lying in the warehouse. Provision for customs duty payable on the goods lying in the warehouse SHOULD be included in cost of respective inventories. Results in understatement of the value of inventory as well as liability Auditor should qualify his audit report in respect of the above matter 20 M P Vijay Kumar

21 #2 : Disclosure requirements Facts of the case Related AS treatment Impact/Remarks Company has valued the inventory at Cost or Net realizable which ever is lower BUT the cost formula used for measuring inventories is undisclosed As per Para 26 (a) of AS 2 Disclosures to be made: The accounting policies adopted in measuring the inventory & Cost Formula used for measurement should be disclosed. Cost formula should be disclosed 21 M P Vijay Kumar

22 #2 : Disclosure requirements Facts of the case Related AS treatment Impact/Remarks From the Schedule of Current assets, loans and advances, it has been noted that inventories were described as taken, valued and certified by the management. As per GN on Audit of Inventories - the use of expression as valued and certified by the management may lead the users of financial statements to believe that the Auditor merely relies on the management s certificate without carrying out any other appropriate audit procedures to satisfy himself about the existence and valuation of inventories. Auditor to advise Management to omit the words as valued and certified by the management, when describing inventories in the financial statement. 22 M P Vijay Kumar

23 AS 3 Cash Flow Statements Common Non-Compliances 23 M P Vijay Kumar

24 #1 : Disclosure requirements Facts of the case Related AS treatment Impact/Remarks Schedule of cash and Bank balance includes the balances of unclaimed dividend account, Margin money account and Fixed Deposits which is under lien with banks. A significant difference has been noted in the amount C&CE and Cash and Bank Balances as reported in the Cash Flow Statement and schedule of Cash and Bank Balances respectively. As per Para 45 of AS 3 Disclosure requirements: Amount of significant C&CE balances held by the enterprise that are not available for use by it along with a commentary by management. As per Para 42 of AS 3 Disclose the components of cash and cash equivalents and should present a reconciliation of the amounts in its cash flow statement with the equivalent items reported in the balance sheet. Disclosure should me made that the figures shown C&CE includes certain balances which are earmarked against liabilities and cannot be used for any other purpose. Disclosure of components of C&CE Reconciliation is mandatory 24 M P Vijay Kumar

25 #1 : Disclosure requirements Facts of the case Related AS treatment Impact/Remarks The unrealized foreign exchange gain was considered to derive Net Profit Before Tax, however, in the Cash Flow Statement when the same figure was used to determine Cash Flow from Operating Activities, the figure of such foreign exchange gain was not adjusted. As per Para 20 (b) of AS 3 Under the indirect method, the net cash flow from operating activities is determined by adjusting net profit or loss for the effects of: (b) non-cash items such as depreciation, provisions, deferred taxes, and unrealized foreign exchange gains and losses; As per Para 27 Unrealized gains and losses arising from changes in foreign exchange rates are not cash flows. Non cash items have to be adjusted in ascertaining cash flows 25 M P Vijay Kumar

26 AS 4 Contingencies and Events occurring after the Balance Sheet date Common Non-Compliances 26 M P Vijay Kumar

27 Facts of the case Related AS treatment Impact/Remarks It is the Company s Policy to take into account the impact of any significant event that occurs after Balance Sheet date but before the finalization of accounts. As per Para 3.2 of AS 4 It provides that events occurring after the balance sheet date are those significant events, both favorable and unfavorable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company, and, by the corresponding approved authority in the case of any other entity. The date should be the date of financial statements approval by Board. 27 M P Vijay Kumar

28 AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies Common Non-Compliances 28 M P Vijay Kumar

29 Facts of the case Related AS treatment Impact/Remarks The accounting policy on prior period adjustments states as Prior period expenses and income are included in respective heads of expenses and income in the profit and loss account. As per Para 15 of AS 5 It requires that the nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived. Amount of prior period items has to be be separately disclosed. 29 M P Vijay Kumar

30 AS 6 Depreciation Accounting Common Non-Compliances Note: As per the notification dated 30 th March 2016, this standard is omitted. 30 M P Vijay Kumar

31 Facts of the case Related AS treatment Impact/Remarks Depreciation on fixed assets has been calculated on Straight Line method on pro-rata basis at the rates specified in Schedule XIV of the Companies Act, However, in case of plant and machinery higher depreciation rates has been charged based upon residual useful life. From the Schedule of Fixed Assets, it has been noted that the company has not charged any depreciation/amortisation on Leasehold Land. Schedule XIV to the Companies Act, 1956 and AS 6 requires that depreciation rates or the useful life of the assets should be disclosed, if they are different from the principal rates specified in the statute governing the enterprise. Paragraph 1 of AS 6, provides that This statement also does not apply to land unless it has a limited useful life for the enterprise. A depreciable asset should essentially have a limited useful life. Leasehold land by its nature has a limited useful life and as such, it should be amortized as required under paragraph 1 of AS 6. The rate if different from statutory rate( life) has to be specifically disclosed Lease hold land has to be amortised 31 M P Vijay Kumar

32 Facts of the case Related AS treatment Impact/Remarks X Ltd. was constructing an assembling unit as part of its factory which was underconstruction. Due to recession, X Ltd. decided to abandon its project. However, since its assembling unit was at the advance stage of completion, X Ltd. decided to convert the same in to a warehouse and gave it on long term lease to ABC Ltd and classifies the asset as Investment Property. The company has not provided any depreciation on it. Under section 205 and 350 read with Schedule XIV to the Companies Act, 1956, no distinction is made between Fixed Assets and Investment Properties and hence depreciation would be required on all assets owned by the Company. Further, as per Circular No. (10)-CL-VI/61 dated , the Department of Companies Affairs has opined that Immovable properties unless acquired for resale represent Fixed Assets Depreciation should be provided on Investment Property also 32 M P Vijay Kumar

33 AS 7 Construction Contracts Common Non-Compliances 33 M P Vijay Kumar

34 Facts of the case Related AS treatment Impact/Remarks A company involved in the Construction business, in its Financial Statements, shows the Schedule of Inventory including a item of Job in progress, without any further disclosures. As per Para 39 of AS 7 The following disclosures are to be made The aggregate amount of costs incurred and recognized profits (less recognized loses) up to the reporting date; The amount of advances received ; and The amount of retentions. The basis for ascertaining % of completion AS 7 warrants significant disclosures of construction contracts including method of ascertaining % of completion The significant accounting policy relating to construction contracts states as below: Job work revenue is accounted on the basis of running bills raised and approved by the clients. Revenue Expenditure is accounted on accrual basis as and when it is incurred. As per Para 21 of AS 7 Recognize revenue and costs based on the stage of completion of the contract activity as on the reporting date. Revenue cannot be recognised based on bills raised Revenue has to be based on stage of completion ascertained on appropriate basis such as cost incurred to total estimated cost, physical proportion method, survey method, etc 34 M P Vijay Kumar

35 AS 9 Revenue Recognition Common Non-Compliances 35 M P Vijay Kumar

36 Facts of the case Related AS treatment Impact/Remarks Sales are stated at figure net of excise duty on the face of the profit and loss account as well as in Schedule. One of the notes to accounts regarding segment reporting states that Inter divisional transfers of goods, as marketable products produced by separate divisions of the company for captive consumption are made as if sales were to third parties at current market prices and are included in turnover. As per Para 10 of AS 9. It requires that the amount of turnover should be disclosed in the following manner on the face of the statement of Profit and Loss: Turnover (Gross) Less: Excise Duty Turnover (Net) xxx xxx xxx ICAI Announcement titled Treatment of Inter-divisional Transfers, provides that Since in case of inter-divisional transfers, risks and rewards remain within the enterprise and also there is no consideration from the point of view of the enterprise as a whole, the recognition criteria for revenue recognition are also not fulfilled in respect of inter-divisional transfers. Presentation has to be Gross less Excise only. The revenue recognition policy to recognize interdivisional transfers as sales is not in line with AS M P Vijay Kumar

37 Facts of the case Related AS treatment Impact/Remarks The accounting policy on revenue recognition, interalia, states that Dividend income is recognized on receipt. As per Para 13 of AS 9 Recognize dividend income when the right to receive the same is established. Recognition of dividend income on cash basis is not correct The accounting policy on revenue recognition, interalia, states that.revenue from sale of products is inclusive of excise and export incentives. As per Para 4.1 of AS 9 Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Export incentives should not be merged with the sales figure and it should be treated as a separate line item under the head of Other income. Also explained in the EAC Opinion (Query No. 1.15, Volume VI, page 43). 37 M P Vijay Kumar

38 AS 10 Accounting for Fixed Assets Common Non-Compliances Note: As per the notification dated 30 th March 2016, this standard is revised and referred to as Property, Plant and Equipment. 38 M P Vijay Kumar

39 Facts of the case Related AS treatment Impact/Remarks The company on account of liquidated damages, due to delay in commencement of supply of gases to customers consequent upon delay in bringing the plant to its working condition on the appointed target date, has been capitalised in its books of account as additional cost attributable to the project. A supplier of various equipment to a power generating unit has also supplied the design for process as well as engineering details. The company under review has capitalised the consideration paid for such design and engineering as an intangibles assets. EAC Opinion The amount payable by the company cannot be capitalised as additional cost attributable to the project. It cannot be treated as DRE to be amortized over a period of 3 to 5 years after commencement of commercial production. As per paragraph 10 of AS 26 In some cases, an asset may incorporate both intangible and tangible elements that are, in practice, inseparable. In determining whether such asset should be treated under AS 10,or as an intangible asset, judgment is required to assess as to which element is predominant. Liquidated damages for asset purchase should be recognised as expense in the P&L The expenditure on detailed engineering and process design is an integral part of the equipment and is also attributable to the cost of bringing the related asset to its working condition for its intended use and should be allocated to the equipment 39 M P Vijay Kumar

40 Facts of the case Related AS treatment Impact/Remarks From the FS of a Company belonging to Hotel Industry, it was observed that it has revalued one of its units located at Delhi, whereas it owns two more properties situated in Kolkata and Mumbai. Para 27 ofas10, requires when a fixed asset is revalued in financial statements, an entire class of assets should be revalued, or the selection of assets for revaluation should be made on a systematic basis. This basis should be disclosed. The company has revalued only a single asset while AS 10 requires the company to revalue the entire class of the asset, and in case if such revaluation has been done on selective basis then the basis of such selection should have been disclosed. The company has failed to disclose the basis of such selection for revaluation of assets. It has been noted that income tax and wealth tax paid has been treated as pre- operative expenses. Paragraph 9.1 ofas10, states: The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. Pre-operative expenses are those expenses which are incurred by the company prior to commercial production Accordingly, the income tax and wealth tax should not be classified under the head of preoperative expenses. 40 M P Vijay Kumar

41 AS 11 The Effects of Changes in Foreign Exchange Rates Common Non-Compliances 41 M P Vijay Kumar

42 Facts of the case Related AS treatment Impact/Remarks The accounting policy regarding Foreign currency Transactions states that Current assets and liabilities denominated in foreign currency as at the Balance sheet date are converted at exchange rate prevailing on balance sheet date except in case of short term loans. As per Para 11 (a) of AS 11 Requires usage of terms monetary assets and monetary liabilities and not current assets and current liabilities. Being monetary item, the shortterm loans in foreign currency should also be translated at the exchange rate prevailing on the balance sheet date, to report foreign exchange differences. Short term loans are monetary item and should be translated at closing rate. 42 M P Vijay Kumar

43 Facts of the case Related AS treatment Impact/Remarks The gain/loss arising due to exchange fluctuation on debtors as well as on creditors has been reported separately under their respective heads, apart from the balance due to/from each such party. Exchange difference should be shown separately and not included in the respective head. Recognising exchange difference on debtors in sales and on creditors in purchases is not correct FS of different enterprises are found to be adopted different accounting policies relating to Sales include realized exchange fluctuation on exports. As per definition given under para 4.1 of AS 9 and the provision stated under para 13 of AS 11, the foreign exchange gain or loss is independent of sales transaction. Clubbing of such gain or loss with revenue is incorrect. Accordingly, any gain or loss, arising due to exchange fluctuation should be shown separately in the profit & loss account. 43 M P Vijay Kumar

44 Facts of the case Related AS treatment Impact/Remarks An accounting policy on foreign currency transactions states that foreign currency transactions relating to purchases of goods and services are translated at the rate prevailing at the time of settlement of the transactions. As per Para 9 of AS 11 Foreign currency transactions relating to purchases of goods and services should be translated at the rate prevailing on the date of the transaction, instead of translating the same at the rate prevailing at the time of settlement of the transaction. Translation of purchases should be by applying rate on date of purchase An accounting policy regarding foreign currency transactions states that Foreign currency assets and liabilities at the year end are recognized at the prevailing exchange rates on the Balance Sheet date. As per Para7(a) of AS 11 only assets and liabilities in the nature of monetary items to be converted at the closing exchange rate and not all the Foreign Currency assets and liabilities which may include non-monetary assets/ liabilities as the case may be. The accounting policy is wrong. Only monetary items should be translated at closing rate 44 M P Vijay Kumar

45 Facts of the case Related AS treatment Impact/Remarks As per the Accounting policy relating to foreign currency transactions the Company uses foreign currency forward contracts to hedge it s risks associated with foreign currency fluctuations relating to certain firm commitments and forecasted transactions. Such forward contracts are utilized against the inflow of funds under firm commitments and the profit/loss arising thereon is accounted in the year of settlement of forward contract. The Company does not use the forward contract for speculative purposes (emphasis supplied). Para 36 of AS 11 requires that apart from recognising the profit/(loss) on the settlement of contracts, it should also recognise the same in each reporting period based on the foreign currency rate prevailing as at the end of the reporting period. The premium or discount arising at the inception of such a forward exchange contract should be amortised as an expense or income over the life of the contract Forward contracts should also be marked to market on date of balance sheet and gain/loss recognised. The Accounting policy here is silent on the treatment of premium or discount that may arise during the inception of such contract. 45 M P Vijay Kumar

46 AS 13 Accounting For Investments Common Non-Compliances 46 M P Vijay Kumar

47 Facts of the case Related AS treatment Impact/Remarks Accounting policy on investments states that Current investments are valued at lower of cost and fair value and Long-term investments are valued at cost. Provision is made for any permanent diminution in the value of investments. Para 32 of AS 13 requires that long term investments should be carried in the financial statements at cost. However, the provision for diminution should be made to recognise a decline, other than temporary, in the value of the investments. Expression permanent diminution is inappropriate The relevant expression is decline which is other than temporary 47 M P Vijay Kumar

48 Facts of the case Related AS treatment Impact/Remarks It has been noted from the financial statements of a company that under the schedule of other income certain profits have been earned from sale of investments. The company had invested in various units and bonds but omitted to disclose the accounting policy used to determine the value of such investments. Paragraph 35(c)(ii) & (iii) of AS 13, interalia, requires to disclose the amounts included in profit and loss statement, for profits and losses on: disposal of current investments and disposal of long term investments and changes in the carrying amount of such investments. As per Para 35 of AS 13, the company should disclose the accounting policy as adopted by it for determining the carrying cost of Investment. Separate disclosure is required to show profits arising from the sale of current investments and long term investments. Accounting policy on carrying amount of investments has to be given. 48 M P Vijay Kumar

49 AS 15 Employee Benefits Common Non-Compliances 49 M P Vijay Kumar

50 Facts of the case Related AS treatment Impact/Remarks The accounting policy relating to employee benefits states as Annual contributions in respect of provident fund are made to the LIC and are accounted for on accrual basis. 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. The 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. Reference to LIC for PF? The accounting policy disclosure is inadequate. 50 M P Vijay Kumar

51 Facts of the case Related AS treatment Impact/Remarks The accounting policy on gratuity states that Provision for gratuity is made in the accounts, considering the Balance sheet date as the notional date of retirement. As per AS 15 the provision for gratuity should be determined through actuarial valuation which should be based on assumption that are not excessively conservation and should reflect the economic relationship considering the factors. It was viewed that the policy of company as adopted by it indicates considers that each of its employee retire on the balance sheet date which is an excessively conservative assumption and also does not reflect the economic relationship between factors such as inflation, salary increase, the return on plan and discount rates. Since it does not consider actuarial risk while valuing its liability towards gratuity, the actuarial valuation is not followed by the company and consequently represents a non compliance 51 M P Vijay Kumar

52 Facts of the case Related AS treatment Impact/Remarks 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 payment are affected. As per Para134 of AS 15, an enterprise is required to provide for termination benefits on accrual basis. VRS should be recognised as expense once there is a constructive obligation From the financial statement of certain companies it has been noted that they provide employee benefits (including defined benefit plans). As per Para 120 of AS 15,requires that an enterprise should disclose the information about defined benefit as specified there under. Disclosure of accounting policy for employee benefits is required and also about the defined benefit plans. 52 M P Vijay Kumar

53 Facts of the case Related AS treatment Impact/Remarks Accounting policy on defined contribution schemes reads as follows: Contribution to Defined Contribution Schemes such as Provident Fund etc., are charged to the Profit & Loss Account as and when incurred. In respect of certain employees who have not opted for Pension Benefits, Provident Fund Contributions are made to a trust administered by the Bank. ASB Guidance on Implementing AS 15,(revised 2005),interalia, states that, 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 Any provident fund scheme administered through trust should be treated as defined benefit plan rather than defined contribution plan, and in view of the same, the liabilities towards such benefit should be based on actuarial valuation and also the disclosure requirements for such defined benefits should be made as required under paragraphs 119 and 120 of AS M P Vijay Kumar

54 AS 16 Borrowing Cost Common Non-Compliances 54 M P Vijay Kumar

55 Facts of the case Related AS treatment Impact/Remarks Accounting policy on Valuation of Inventories states that Finished goods are valued at lower of cost or net realisable value; cost includes depreciation, interest (excluding interest on discounting of bills) and direct expenses to the point of stocking, excise duty but excludes administration and selling expenses. Para 12 of AS 2, Valuation of Inventories provides that interest and other borrowing costs are usually considered as not relating to bringing the inventories to their present location and condition and are, therefore, usually not included in the cost of inventories. Para 5 of AS 16, Borrowing Costs provides that those inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis over a short period of time, are not qualifying assets. As per AS 16, no borrowing cost (interest) can be capitalised unless such inventories take a substantial period of time to get ready for sale. 55 M P Vijay Kumar

56 Facts of the case Related AS treatment Impact/Remarks Schedule of secured loans as well as related information as given in notes to accounts of a Company, reflects that certain borrowing cost has been incurred during the year, a portion of which charges has been capitalized to the value of fixed assets and rest of portion has been expensed. Paragraph 23 of AS 16, requires that the financial statements shoulddisclose: (a) the accounting policy adopted for borrowing costs; and (b) the amount of borrowing costs capitalized during the period. As company has capitalized a significant portion of financial charges to the value of fixed assets it should have disclosed the accounting policy as adopted by it for borrowing cost. 56 M P Vijay Kumar

57 Facts of the case Related AS treatment Impact/Remarks Different companies are found to be treating debt restructuring charges/ external commercial borrowings upfront fees as follows: Restructuring charges which had been paid to extinguish high cost debts were written-off over the tenure of fresh loans taken for refinancing such high cost debts. Para 6 of AS 16, states that Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation should be determined in accordance with this Statement. Other borrowing costs should be recognised as an expense in the period in which they are incurred. As per paragraph 3 as well as paragraph 4(c) of AS 16, borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds and it may includes amortisation of ancillary cost in connection with arrangement of borrowings. Debt restructuring charges paid to extinguish high cost debts were not incurred for the acquisition, construction or production of qualifying assets. It involves revision in the terms of borrowings. Therefore, such costs are not eligible for capitalisation with the cost of asset. AS 16 does not prescribe amortisation of such costs. The treatment followed by the company to defer such expenses is not in accordance with the requirements of AS M P Vijay Kumar

58 AS 17 Segment Reporting Common Non-Compliances 58 M P Vijay Kumar

59 Facts of the case Related AS treatment Impact/Remarks At times, neither the statement on significant accounting policies contain any accounting policy on Segment Reporting nor contain any segmental information. It was observed that in the absence of any information, one may conclude that either despite the existence of reportable segments no segmental information has been disclosed or there are no reportable segments. Explanation to Paragraph 38 of AS 17 requires that where the company has neither more than one business segment nor more than one geographical segment, then, the fact that there is only one business segment and geographical segment should be disclosed by way of the note. The fact of only one segment should be disclosed where there is no segment reporting 59 M P Vijay Kumar

60 Facts of the case Related AS treatment Impact/Remarks There were significant differences in the figures of net profit after tax, total assets and total liabilities, as reported in the financial statement as against those reported in the segment report of the enterprise. As per Paragraph 46 of AS 17, an enterprise should present reconciliation between the information disclosed for reportable segments and the aggregated information in the enterprise financial statements. In presenting the reconciliation: segment revenue should be reconciled to enterprise revenue; segment result should be reconciled to enterprise net profit or loss; segment assets should be reconciled to enterprise assets; and In the absence of reconciliation between the figures, it was viewed that the segment report provided is not in accordance with the requirement of AS 17. segment liabilities should be reconciled to enterprise liabilities. 60 M P Vijay Kumar

61 Facts of the case Related AS treatment Impact/Remarks One of the notes to accounts states that the company is primarily engaged in the segment of Iron and Steel Products and there are no reportable segments as per Accounting Standard (AS 17). Further, it has been noted from Management Discussion & Analysis Report as well as schedule of sales that the sales comprised of both export sales and domestic sales, which was significant. As per Para 27 of AS 17, provides that; A business segment or geographical segment should be identified as a reportable segment if: (a) its revenue from sales to external customers and from transactions with other segments is 10 per cent or more of the total revenue, external and internal, of all segments. It is evident from the note that the company operates in only one business segment. However, considering the facts, that both the export as well as domestic sales was significant, it was viewed that the risk and returns of the enterprise are affected by the fact that it operates in other countries apart from India. In the absence of any business segment, its primary format for reporting segment information would be geographical segments. However, no such reporting has been made which is against the requirements of AS M P Vijay Kumar

62 AS 18 Related Party Disclosures Common Non-Compliances 62 M P Vijay Kumar

63 Facts of the case Related AS treatment Impact/Remarks In the Report on Corporate Governance, ABC Ltd. has been mentioned as a Joint Venture company. It has also been noted from the Schedule of Investment that the company has made an investment in the equity shares of ABC Ltd. during the year, however, no disclosure has been made under related party disclosure in this regard. While one of the notes to accounts stated that Legal and professional charges include certain amount which has been paid to a firm in which one of the director is a partner, however, such transaction was not reported under Related Party Disclosure as transaction with the Key Management Personnel. As per Paragraph 3(b) of AS 18, RPR includes associates & joint ventures of the reporting enterprises and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture. As per Paragraph 23 of AS 18 requires that if there have been transactions between related parties, during the existence of a related party relationship, the reporting enterprise should disclose the transaction in its financial statements Disclosure should have been made of the of joint venture relationship with ABC Ltd. and the transaction ( investment during the year) The transaction should be reported as RPT 63 M P Vijay Kumar

64 AS 19 Leases Common Non-Compliances 64 M P Vijay Kumar

65 Facts of the case Related AS treatment Impact/ Remarks From the Schedule of Other Income as well as Schedule of Administration and Other Expenses, it has been noted that there is an income by way of lease rent as well as expenses in the nature of lease rentals. It was viewed that the lease rental income as well as lease rental expenses indicates that the company had given as well as taken certain assets on lease. It is not clear as to whether such leases were finance leases or operating leases as per the facts of the case. As per Para 28 of AS 19 The recognition of finance income should be based on a pattern reflecting a constant periodic rate of return on the net investment of the lessor outstanding in respect of the finance lease. As per Para 40 of AS 19 Lease income from operating leases should be recognised in the statement of profit and loss on a straight line basis over the lease term, unless another systematic basis is more representative of the time pattern in which benefit derived from the use of the leased asset is diminished. The accounting policy as adopted for recognition of the revenue received as Lease rent has not been disclosed. 65 M P Vijay Kumar

66 AS 20 Earnings Per Share Common Non-Compliances 66 M P Vijay Kumar

67 Facts of the case Related AS treatment Impact/Remarks In the Profit and Loss Account of a company, no information has been disclosed with regard to Earning per Share of the company. Certain companies disclose the numerator and denominator used in calculating basic and diluted earnings per share but do not disclose the reconciliation between the two denominators. As per Para 8 of AS 20 The company has to disclose the basic earning per share or diluted earning per share on the face of the Profit and Loss Account. As per Para 48 of AS 20 It has to disclose any information with regard to calculation of earning per share either in Schedule or in Notes to Accounts of the financial statements. As per Para 48 (ii) (b) of AS 20, an enterprise along with other disclosures should also disclose the weighted average number of equity shares used as the denominator in calculating basic and diluted earnings per share and a reconciliation of these denominators to each other. EPS has to be disclosed on face of P&L for all companies Reconciliation between the two denominators is a must 67 M P Vijay Kumar

68 Facts of the case Related AS treatment Impact/Remarks From one of the notes to account of a company it has been noted that the diluted earning per share has been stated to be as Not Applicable. It was viewed that in absence of potential equity shares both the net profit or loss for the period attributable to equity shareholders and the weighted average number of shares outstanding during the period will remain same as that in case of basic earnings per share. DEPS in such cases should be shown even if it is same as BEPS The company may have stated Diluted EPS as not applicable either because there are no potential equity shares or potential equity shares (if any) have an anti dilutive impact. Hence, if a company has no potential equity shares then its diluted EPS would be the same as basic EPS. Again in case potential equity shares have an anti dilutive effect, then such potential equity shares are ignored for calculating diluted EPS which will again result in diluted earning per share being equal to basic EPS rather than stating it as NA. 68 M P Vijay Kumar

69 AS 22 Accounting for Taxes on Income Common Non-Compliances 69 M P Vijay Kumar

70 Facts of the case Related AS treatment Impact/Remarks Certain companies do not disclose the break-up of the Deferred Tax Liability/ Deferred Tax Asset either in the schedule or notes to accounts. The deferred tax assets and liabilities had been presented in either of the manner as given below: Deferred tax liability shown as a part of Loan Funds. Deferred tax (net) shown after the head Net Current Assets. Deferred tax Liability is shown as a deduction from the Application of Funds. Deferred tax Liability is shown as a part of Shareholders Funds. Deferred tax Liabilities is shown as distinct subhead under the Schedule of Provisions. Para 31 of AS 22, requires that the break-up of deferred tax assets and deferred tax liabilities into major components of the respective balances should be disclosed in the notes to accounts. Explanation to Paragraph 30 of AS 22 requires that deferred tax liabilities should be disclosed on the face of the balance sheet separately after the head Unsecured Loans and deferred tax assets should be disclosed on the face of the balance sheet separately after the head Investments. Disclosure of breakup of deferred tax assets or deferred tax liability is a must. The presentation of DTA/ DTL as prescribed is to be strictly adhered to 70 M P Vijay Kumar

71 Facts of the case Related AS treatment Impact/Remarks A company had the carry forward of losses and its accounting policy with regard to Deferred tax, inter alia, states that.the management is of the opinion that sufficient future taxable income will be available against which, such deferred tax assets will be realized. As per Para 17 of AS 22, requires that where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recognized only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realized. The policy of company is inappropriate. For these items virtual certainty supported by convincing evidence that sufficient future taxable income will be available is essential 71 M P Vijay Kumar

72 Facts of the case Related AS treatment Impact/Remarks The accounting policy relating to deferred tax states that Deferred tax liability and asset are recognized, subject to the consideration of prudence, on timing differences using the tax rates substantively enacted on the Balance Sheet date. Para 15 of AS 22 states that deferred tax assets should be recognized and carried forward only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realized. Although the deferred tax asset has been recognized, however, it is not clear as to whether there exists reasonable certainty that sufficient future taxable income would be available against which such deferred tax assets could be realized. Thus, the stated accounting policy with regard to recognition of Deferred Tax Assets is not complete. 72 M P Vijay Kumar

73 AS 23 Accounting for Investments in Associates in CFS Common Non-Compliances 73 M P Vijay Kumar

74 Facts of the case Related AS treatment Impact/Remarks It was noted from the schedule of Related Party Disclosures that the Company has an associate company. As per Para 23 of AS 23 requires that Investments in associates accounted for using the equity method should be classified as long-term investments and disclosed separately in the consolidated balance sheet. The investor s share of the profits or losses of such investments should be disclosed separately in the consolidated statement of profit and loss. The investor s share of any extraordinary or prior period items should also be separately disclosed. It was noted that the financial statements of associate company had not been included in the Consolidated Financial Statements. Further, it was noted that neither the investors share of the profits or losses in such associate company had been separately disclosed in the Consolidated Statement of Profit & Loss nor the auditors report provide any reference on the same. 74 M P Vijay Kumar

75 AS 24 Discontinuing Operations Common Non-Compliances 75 M P Vijay Kumar

76 Facts of the case Related AS treatment Impact/Remarks In the Explanatory statements pursuant to section 173(2) of the Companies Act, 1956, states as follows; As you are aware that you exited the business of manufacturing fertilizers and has taken up real estate activities with the consent of shareholders As per Para 20 of AS 24 An enterprise should include a description of the discontinuing operation(s), the reporting segment to which it belongs to, relevant dates of discontinuing, carrying amounts, relating revenue and expenses, pre- tax profit and loss and net cash flows. AS 24 and Schedule VI (R) require presentation of discontinuing operations. 76 M P Vijay Kumar

77 AS 26 Intangible Assets Common Non-Compliances 77 M P Vijay Kumar

78 Facts of the case Related AS treatment Impact/Remarks The accounting policy relating to Miscellaneous Expenditure states that Preliminary expenses are deferred and are written off over the period of five years. It has been noted from the Director s Report of a company that Research & Development is carried out in house as well as with the help of external source also and the expense incurred on this are booked under general accounting head. The ICAI has issued an Announcement titled Applicability of AS 26, to Intangible items. which states that in case expenditure meets the definition of the term asset and the recognition criteria thereof, the same should be capitalised as part of the cost of that asset, otherwise, such expenditure should be expensed in the profit and loss account in the year in which the expenditure is incurred. As per Para 96 of AS 26, The financial statements should disclose the aggregate amount of research and development expenditure recognized as an expense during the period. As per AS 1 All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. The preliminary expenses can not be regarded as a resource controlled by the company. Accordingly, such expenses should be expensed in the Profit and Loss Account in the year in which it is incurred. Separate disclosure should have been made with regard to such R&D expenditure was found in the P&L. The accounting policy with respect to the Research & Development Expenditure should also be disclosed. 78 M P Vijay Kumar

79 Facts of the case Related AS treatment Impact/Remarks From the accounting policy relating to depreciation it has been noted that the intangible assets like Brands and Goodwill are being amortised over a period of 20 years. As per Para 94 of AS 26 if an intangible asset is amortised over more than ten years, the reasons should be disclosed, why it is presumed that the useful life of an intangible asset will exceed ten years from the date when the asset is available for use. Disclosure should be made on justification for such intangible assets which are amortised over a period exceeding 10 years. 79 M P Vijay Kumar

80 AS 27 Financial Reporting of Interests in Joint Ventures Common Non-Compliances 80 M P Vijay Kumar

81 Facts of the case Related AS treatment Impact/Remarks From the Related Party Disclosures, it was evident that the Company has a joint venture with A Ltd As per Para 53 of AS 27 A venturer should disclose a list of all joint ventures and description of interest in significant joint ventures. In respect of jointly controlled entities, the venturer should also disclose the proportion of ownership interest, name and country of incorporation or residence. Disclosure should have been made for the relationship in the nature of joint venture. 81 M P Vijay Kumar

82 AS 28 Impairment of Assets Common Non-Compliances 82 M P Vijay Kumar

83 Facts of the case Related AS treatment Impact/Remarks The statement on accounting policies does not contain any accounting policy as adopted by the company to recognize impairment of assets. Further, there is no information either in the Schedule or in the Notes to Accounts to indicate that the company has conducted any impairment tests. As per Para 6 of AS 28 An enterprise should assess at each balance sheet date whether there is any indication that an asset may be impaired. If any such indication exits, the enterprise should estimate the recoverable amount of the asset. Disclosure should be made of accounting policy regarding impairment of assets and where applicable a note indicating that the impairment test has been conducted. 83 M P Vijay Kumar

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85 M P Vijay Kumar mpv@icai.org 85 M P Vijay Kumar