For Private Circulation Only • October 2014 • Vol 8 Issue 10
Society of Auditors
Chennai Inside this Issue... •
From the Edit Pad
2
•
Companies Act 2013 –Honey ! I Shrunk the Income tax !
5
Consolidation of Financial Statements – The First Time Challenge
7
•
•
Indirect Tax Snippets
10
•
Old Madras Road
12
•
Recent Judicial Decisions Reported
13
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Programme Notice - One Day Programme on Consolitation of Financial Statements
14
FROM THE EDIT PAD
P.S. Prabhakar
Our Prime Minister has kick started a nationwide ‘cleaning campaign’ under the name SWACHH BHARATH, a laudable initiative. He set an example by taking the broom in his hand. But, symbolism apart, the cleansing as a national activity has to begin everywhere. The BJPled NDA Government has been elected with a stunning victory not for such symbolism only and certainly not just for delivering a physically clean India alone. The mess of the earlier decade will have to be cleaned out too and for that one of the major planks of the BJP’s campaign viz., the rooting out of the black money menace must happen decisively. Unfortunately, we have been only seeing flip-flops on this aspect which are accentuated by FM’s ‘mysterious smiles’ and ‘hintspregnant interviews’. Frankly, we are not inspired. Always we believe in “Substance over form”. It is hoped that this prevails in the concept “Swachh Bharath” and that Sri Modi, the most eloquent PM we have ever had, puts his foot down firmly to begin the end of the black money menace. With this introductory note, I shall go to the operative part of my Edit Pad under two topics.
was never an impediment. By 1967, we had a full "swadeshi" rocket - Rohini 75. ISRO, successfully completed its 100th mission in Sriharikota, in Sept, 2012, a significant achievement for the 5-decade old organization. Were the people at ISRO without obstacles? Was the sailing smooth always? No. Even when 10 missions succeeded, one
A Tale of two institutions: Mangalyan on Mars (MOM) was one of the proudest moments for the nation and the institution which achieved the mission with astounding success at an unbelievably low cost of Rs. 450 crores is ISRO. I am sure most of you are aware that ISRO’s achievement has been against several odds. To start with, the mother institution Vikram Sarabhai Space Centre was given, believe me, a cowshed, and an accompanying cattlefeed shop to set up the laboratory back then. Since the organization was allotted a limited budget, there were no proper facilities for scientists and engineers. They stayed in a lodge near Thumba station. The only mode of transportation available to them were bicycles and bullock carts which only served as goods carriers to carry the parts, fuel and payload on cycles and bullock carts to launch site. For them, of course, inspiration was never in short supply and perspiration
Apple Satellite being transported in bullock cart (1981)
unfortunate failure was slighted, debated and criticized in media. Funds allocation was intensely opposed many a time. Questions were raised by politicians as to whether such lavish space exercises were necessary for a ‘poor nation’ like ours. More. The infamous scandal involving a senior scientist of ISRO Nambi Narayanan, loaded with sleaze and espionage, effectively put brakes on the development of an indigenous cryogenic rocket engine for decades with suspected international conspiracy driving it. Certain scientists mysteriously died and some disappeared. (contd. on next page)
AUDITOR
Editorial Board
A periodical from Society of Auditors Chennai
CA P S Prabhakar, Editor
Society of Auditors “Platinum Chambers” 33, TNHB Complex, 4, Luz Church Road, Mylapore, Chennai - 600 004. Phone : 044-2498 6979 E-mail : society.auditor@gmail.com editor@societyofauditors.in Website URL: www.societyofauditors.in
Adv B Ramana Kumar CA P Anand, President, Ex-officio Member CA R Sivakumar, Vice President, Ex-officio Member CA S Ramakrishnan, Vice President, Ex-officio Member CA B K Moorthy, Secretrary, Ex-officio Member CA Karthik A Bhatt
(contd. from the previous page)
However, today the nation is proud about its indigenous, home-grown effort MOM and stands tall amidst the envious comity of nations, with individual space ambitions. What started off in the cow shed is now next to mars. Self sustenance, or bootstrapping as it is called, was what Vikram Sarabhai’s vision.
Compare it with ICAI, our very own Alma Mater, which in its 65 years of existence has not produced A SINGLE document or research work of international standard on its own. As a premier accounting body of the nation, has it risen to any important occasion of huge financial import? On this black money issue, should not have ICAI, on its own, commissioned a study on the issue and come out with an outstanding document? Especially, when the Governments (then and now) attempting to trivialize the whole issue as a tax related one by bringing DTAAs in to the focus. ICAI is rightly perceived to possess the best tax minds, after all. Whether a stock market scam or a mega corporate scandal or an NBFC scam, ICAI’s role in research and study for suomoto advices to the Government has been next to nothing. For all this, ICAI has never come in to any serious scrutiny by the Government or media. Even when there is lavish spending on Council members’ travel costs and legal costs to defend the court cases, there is no question raised by anyone. And the height of the corporate governance is that the Council would prepare the accounts, would approve it themselves, would get audited by a member of the body that is designed to regulate him and just ‘inform’ the members. All that it has done is to have conducted examinations which it claims as world class only by the single digit pass percentages it gives away, conducted seminars all over the country which are attended more for the eats and the CPE credits, tormented several members in its flawed disciplinary mechanism, flown its council members to several nations ostensibly to attend meetings AUDITOR • October 2014
and international seminars, bought up lands and buildings (probably by mistakenly interpreting the slogan ‘partners in nation building’!) all across the nation like a pan India realtor, copy-pasted accounting and auditing standards, happily second fiddled IASB and acted as cheer leaders for IFRS, did precious little to rein in multinational accounting firms which have illegitimate presence in the nation and……and……I can really go on. Oh, I forgot to mention – it also has a bloated kitty of funds that is over Rs. 1000 crores – enough for two Mangalyan missions! (Sri R. Sivakumar says that on Fair Value accounting basis, we may have to add a further few zeroes to this figure and then can fund space missions to all the planets. And we can truly claim our Institute as ‘out of the world!’) And with transparency in governance becoming the buzzword in the commercial world, ICAI revels in secrecy in many facets. Ask for any info in RTI, the officials would try every possible trick in the book to avoid giving or to give irrelevant info or to find reasons why it cannot be given. I am personally aware of the fact that a B-school attached to Oxford University did a research (impact study) on IFRS’ applicability in India, at the behest of ICAI Research Foundation (yes, we have one by that name!) and also paid them a good fee. I also came to know that the University completed its study and dispatched a professor to Delhi to personally hand over the report. However, as it did not suit the international masters called IASB, the report was buried. When queried under RTI, Mr Karthikeyan, Secretary of ICAI who also doubles up as a Director of ARF conveniently took the stand that ARF is not covered by RTI and hence info sought could not be given. What are they hiding and why are they hiding? Same case with the successive reports of the committees headed by Mr Y M Kale, Mr Jayant Gokhale and Mr Uttam Prakash Agarwal on the MAFs operating in India. In the matter of AGM of SIRC, just because certain ‘inconvenient’ resolutions were tabled for discussion, the whole AGM was cancelled at the last minute and after a member went to Hon’ble High Court in Chennai and obtained a stay on the conduct of AGM ‘without considering the resolutions proposed under Reg. 150’, the SIRC, like a puppet on the strings, at the ‘instructions of ICAI’, conveniently scuttled the AGM that should have been held in 2013 and never even bothered to convene one for 2014. So, why are we even pontificating on corporate governance when we don’t have a semblance of it in our own body? Every year’s Regional Conference is held only to showcase the ‘local power’ of the Chairman and to somehow better the crowd record of last year. There are certain CCMs who meddle too much in the affairs of the RC in the respective centres and there are some who are defiantly indifferent. Most Council members look after themselves, their practices, money and fame acquiring opportunities, ensure visibility, get elected again and try to become (contd. on next page)
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(contd. from the previous page)
Rs. 8000/- per paper (16 times of the earlier cost).
Vice President / President which position(s) give them a near-God status especially by gullible members in upcountry branches, besides innumerable photo-ops. If an institution is infested with such people, how can it ever achieve anything significant? Unfortunately, the general membership also has been electing such people. It is time that Chartered Accountants also believe that the time has come for a “Swachh ICAI” and ensure well-meaning people are elected and begin sincere attempts to cleanse ICAI, the great institution of ours.
On looking up the FAQs and the ‘procedures’ that were laid out, I was appalled to see that there was no assurance whether revision in marks would happen even if ‘mistakes’ in the evaluation were found but there was an emphatic statement that even in such cases, fee charged wouldn’t be refunded. Insensitivity would be the mildest term to describe the mindset of the people at helm but, for sheer reasons of objectivity, I prefer to use it instead of the more appropriate terms like ‘audacity’ or “callous attitude”.
Examination Matters:
Despite the efforts of ICAI to make this notification inconspicuous, it got the attention of the eyeballs of a few vigilant members, who ensured that the matter went viral on e-mails and consequently, ‘objections’ were raised by many members. It remains to be seen how the ICAI reacts to the catena of mails expressing their objections. However, to be fair to ICAI, I have to mention that the President Sri K.Raghu himself called me on the very same day I raised the objection and explained ‘how he was not responsible’ for this and also assured that the objections would be viewed objectively.
It is a universally accepted fact that CA examinations in India are the ‘toughest’, going by the input / output ratio of students. The institute is very proud that it has got the ‘best examination system’ that is almost impenetrable and the poor results are only because students are of poor quality. (In fact, some people perceive otherwise. An MNC executive abroad once asked me whether I realized that an institution that returns single digit pass percentages year on year is one that must have serious quality issues within!). Students who invest a lot of money, time, energy and efforts get completely frustrated with the marks they get. Till recently, there was no any recourse to them to even find out whether their papers were valued properly. There was a system of re-checking (or verification) which invariably would result in ‘no change’. After all, the system has a (self-perceived) reputation of being world class. Why would they spoil it by ‘accepting’ hard truths? Consequent to a Supreme Court decision that a student could see for himself and even acquire a copy of the evaluated answer scripts, a certain procedure was announced by ICAI. Instances of wrong valuations, omissions to value, blatantly incorrect marking etc. then came to the fore and ICAI had to eat the humble pie and announce the ‘revised results’ in such cases. But the ego is hurt. How to ensure that students don’t get the temerity to question them? Make the cost of verifying, inspecting and obtaining a copy prohibitive. What an idea, Sir ji? A notification was issued (bundling it with an announcement of increase in stipend rates to levels which are still lesser than what are actually prevalent), that sought to make amendments to the CA regulations – to the effect that the cost of ‘verification’ of answer scripts to be increased 5 fold (Rs. 500/- to Rs. 2500/- per paper), cost of ‘inspection’ to go up to a maximum of Rs. 5000/- per paper (10 fold) and that of ‘getting a copy of the valued script ‘ up to a maximum of
4
On a larger perspective, instead of breast beating about our examination system, we need to introspect whether we are doing necessary justice to the posterity. Are our examiners competent? How is the Institute sure that the examiners do not ‘outsource’ such an important activity to their family, friends or professional acquaintances, who may not be able to apply their minds but blindly go by the key provided by ICAI and ‘lock’ the careers of students? Why can’t be there a central evaluation in regional centres, with multiple layers of review / supervision on-site? If ICAI’s election counting can happen in a protected building for a week or ten days with necessary quarantine measures, why can’t such things be arranged for evaluation of answer scripts? Are examination results less important than election results? Do such things cross the minds of the people who man the ICAI? For God’s sake, let us realize that as a profession, we haven’t done enough to the society in the past decades. Let us not spoil the future decades also. I should end with a self-explanatory note: I am as fond of our mother institution as any proud member can be. My strident criticism is not on the institution per se but on those who ‘mismanage’ it either out of lack of time or lack of concern or lack of ability to appreciate sensitivities. If a council member has time only for certain things that will mightily please him but not for the overall enhancement of values that the institution stands for, he has no business being there. I close with the select lines of the immortal poem of an immortal poet Subramania Bharathiar:
kdjpy; cWjp Ntz;Lk; epidT ey;yJ Ntz;Lk; fz; jpwe;jpl Ntz;Lk; fhhpaj;jpy; cWjp Ntz;Lk;> cz;ik epd;wpl Ntz;Lk;. AUDITOR • October 2014
Companies Act 2013 – Honey ! I Shrunk the Income tax ! CA. Sripriya Kumar with inputs from the Editor & CA Vedavalli The Companies Act 2013 has several unique firsts. These include a stream of notifications, circulars and power to remove difficulty orders which confirms one’s suspicions that the Act was in haste. This article discusses the latest notification on yet another change to Schedule II and more interestingly attempts to reflect an insight of the Editor of the Auditor on the possible adverse impact of the provisions of depreciation on the tax collections of the economy for the financial year 2014-15. What is intriguing is the omission of this aspect by the eagle eye of the taxing authorities. Comments and additional speculations are most welcome, as always !
Though the obvious rationale is to align with IFRS, the logic for the change in rates is not clear as are the reasons for other changes proposed in this Act, the foremost amongst them being the application of multi various thresholds for the applicability of different provisions of the Act. The Act also provides that the adjustment in useful life needs to be done retrospectively which means that the residual life of the asset as at March 31, 2015 has to be in line with the Companies Act 2013. The excess depreciation charge if any has to be adjusted in the financials of the present year or adjusted against reserves and surplus.
Nature of asset
Useful life Companies Act 1956 (SLM) – In years
Useful life Companies Act 2013 – In years
Factory buildings
28
30
Buildings (other than factory buildings) other than RCC frame structure
58
30
Plant & machinery other than continuous process plant
20
15
General Furniture & Fittings
15
10
Computers – end user devices like desktops, laptops
6
3
The Companies Act 2013 proposes higher rates of depreciation than those prescribed by the Companies Act 1956. It also speaks of the need for componentisation of assets and application of differential rates for different components of the assets where each such sub component has differing useful life. New Schedule II wef August 29, 2014 The useful life of an asset shall not ordinarily be different from the useful life specified in Part C and the residual value of an asset shall not be more than five per cent of the original cost of the asset: Provided that where a company adopts a useful life different from what is specified in Part C or uses a residual value different from the limit specified above, the financial statements shall disclose such difference and provide justification in this behalf duly supported by technical advice. Useful life specified in part c of the schedule is for whole of the asset and where cost of a part of the asset is significant to total cost of the asset
Notification dated August 29, 2014. The MCA issued a notification ( yes, one more ) on 29 August 2014 which proposes the following changes to Schedule II relating to depreciation.
Impact The useful life of an asset shall not be longer than the useful life specified in Part ‘C’ and the residual value of an asset shall not be more than five per cent. of the original cost of the asset: Provided that where a company uses a useful life or residual value of the asset which is different from the above limits, justification for the difference shall be disclosed in its financial statement.
The requirement under sub-paragraph (a) shall be voluntary in respect of the financial year commencing on or after the 1st April, 2014 and mandatory for financial
New Schedule II wef August 29, 2014 The option for a company to adopt rates other than those specified in Part C and a residual value in excess of 5% is possible only if: 1. Disclosure in financial statements 2. Justification for the same 3. Supported by technical advice is a new inclusion
Componentisation is not mandatory for financial statements for the year ended March 31, 2015 (continued on next page)
AUDITOR • October 2014
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(continued from previous page) New Schedule II wef August 29, 2014
Impact
New Schedule II wef August 29, 2014
and useful life of that part is different from the useful life of the remaining asset, useful life of that significant part shall be determined separately
statements in respect of financial years commencing on or after the 1st April,
From the date of this schedule the carrying amount of the asset as on that date
From the date of this schedule the carrying amount of the asset as on that date
a. S h a l l b e d e p r e c i a t e d o v e r t h e a. Shall be depreciated over the remaining useful life of the asset as remaining useful life of the asset as per this schedule per this schedule b. After retaining the residual value b. After retaining the residual value shall may be recognised in the opening be recognised in the opening balance balance of retained earnings, where of retained earnings, where the the remaining useful life of an asset remaining useful life of an asset is Nil is Nil From the date of this schedule the carrying amount of the asset as on that date
Tax Impact of revised depreciation The enhanced rates of depreciation are likely to impact the book profits and a consequential decline in tax payouts which can be quite substantial. An interesting aspect is that the retrospective correction can also be reflected in the current period P&L and not necessarily against the opening reserves and surplus as per the August 29, 2014 notification. Let us consider the below example where a lap top is worth Rs 60 and was purchased 3 years back. The WDV should be 0 as per the 2013 Act whilst the actual accumulated depreciation is only Rs 30. The Company has the option of writing off Rs 30 to the P&L or against Reserves and Surplus. Cost
Year 1
Year 2
Year 3
WDV
Where the remaining useful life of an asset is Nil as on April 1, 2014, the company can write off the balance of the asset ( except the residual value ) either against the retained earnings or by a charge to the P&L which was not possible earlier
•
It is likely that Companies with book profits and no tax profits will opt for an adjustment against the present period P & L Account to further reduce the MAT.
•
Certain companies where MAT was applicable would record lower book profits and consequentially a lower MAT will be payable.
An example is illustrated below: Particulars Projected profit
INR 260,000,000
Impact of additional depreciation for the year -17,000,000 Revised profits expected
243,000,000
If company under MAT - MAT on book profits assuming no other adjustments to MAT
50,934,015
As Is
1956
60
10
10
10
30
If depreciation adjustment not done MAT payable for current year
54,497,300
Shld Be
2013
60
20
20
20
0
Difference in cash outflow for MAT
-3,563,285
Difference
-30
The above increase in depreciation rates will impact the tax man as well. It is likely that large corporates would have already considered the economic useful life rather than apply erstwhile Schedule XIV rates. In such cases, there would be little impact on alignment to Schedule II rates. Further, there could also be a release of accumulate depreciation provisions to reserves and surpluses. However, it is likely that smaller and closely held companies which have adopted Schedule XIV rates following situations vis a vis Income tax payouts could emerge. •
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Certain companies where MAT was applicable would slip to book losses and no consequential MAT will be payable
Apart from the direct hit that the tax men would take on the lower quantum of income taxes collectible, as the companies’ lower book profits would impact the dividend paying capacity, low dividends or no dividends would be paid. This would result in lower collection of Dividend Distribution taxes as well. Most companies (other than the new ones) would have assets whose block would have to be reduced to NIL based on the new rates. These may be adjusted against the opening reserves which will also reduce the book value and the resultant net worth of a company in a single year. The collateral damage could be the impairment of funds-raising capacity, strain on the bankability of the financial statements etc. In the current regime, the FinMin and MCA are under the same Cabinet Minister and MoS. Will they do something to do a balancing effect? AUDITOR • October 2014
Consolidation of Financial Statements – The First Time Challenge BACKGROUND As per Section 129 (3), every company having one or more subsidiaries shall prepare consolidated financial statements (CFS) apart from its standalone financial statement which shall also be laid in the Annual General Meeting. For this purpose, the term subsidiary shall include an associate or a joint venture. While AS 21 deals with the principles involved in Consolidation of Financial Statements, AS 23 deals with accounting of Investment in Associates in Consolidated Financial Statements and AS 27 covers Financial Reporting of Interests in Joint Ventures. AS 18 is also relevant as it discloses the related party transactions, the bedrock for triggering the consolidation requirement. Companies evolving a process for CFS will have to understand, in detail, the requirements and plan the path for compliance towards the same. The process of CFS involves a quicker finalisation of the standalone entities (thereby giving time for the hitherto non-existing CFS process), understanding the nuances of consolidation and adequately planning for the same by ensuring availability of sanitised (audited) information. Initial investment in the form of training sessions (understanding the Standards, technical requirements, disclosure aspects, dry run) will be of a great investment. CONSOLIDATED FINANCIAL STATEMENTS
COMPLETION OF INDIVIDUAL STANDALONE FINANCIAL STATEMENTS
TRAINING
CONSOLIDATION PROCESS
TRAINING NEEDS It is important for Finance and Accounting teams to understand the consolidation process since any action in individual companies may affect this process (e.g. new type of transactions with related party can go unreported unless the accounting staff trigger this for mention). It is also equally important that all finance and accounting staff have a thorough understanding of the Accounting Standards involved. The concepts of “Control”, “Significant Influence” need to be understood as AUDITOR • October 2014
CA Mahesh Krishnan
well as the principles of Consolidation including the requirements of Auditors. Practical hints for mundane questions like the following (illustrative) can be garnered only in training sessions. 1. What is meant by control / significant influence 2. 3. 4. 5. 6. 7. 8.
When to exclude a subsidiary from consolidation How to account for AS 22 Deferred Taxes in CFS What are the mandatory notes to accounts in CFS Does new Sch VI apply in whole to CFS? How will post-acquisition reserves be adjusted? Treatment of minority interest Calculation of goodwill on consolidation (issues on how to compute if a Group purchases a company which in turn controls step down subsidiaries – should goodwill be based on standalone or CFS of the purchases entity)
INDIVIDUAL STANDALONE ACCOUNTS Some of the planning aspects would revolve around: 1. Pre-fixed timelines for completion of statutory audit of standalone financial statements 2. This, in turn, may require robust interim audit so as to avoid last minute surprises 3. Audit teams (external Firms) to get more comfort on financial closure processes / controls on financial reporting to facilitate faster finalisation 4. Also the new reporting requirements in audit report (as per Companies Act 2013) would need to be discussed in interim audit stage itself with the auditors so that this does not delay the individual FS sign-offs 5. Standardisation of financial statement formats across companies / approach of multiple audit Firms dealing with these audits. Some illustrative examples given below: a. Standardisation of contingent liability formats b. Standardisation of expense heads c. Determination of what / what-not to report under ‘miscellaneous expenses’ d. Notes on accounts to cover all details uniformly (some companies give details on exposed forex transactions – many companies do not disclose) e. C o n s u m p t i o n ( t r a d i n g / m a n u f a c t u r i n g ) disclosures and sub-schedule (continued on next page)
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(continued from previous page)
6.
Identification of Qualified Reports of earlier year and re-mediation plan to eliminate audit qualifications to the extent possible. Otherwise, the same may result in the CFS also being qualified.
7.
Determination of MIS for Consolidation Purpose (Reporting Pack / Group Audit Pack) which should preferably be signed off by the S t a t u t o r y A u d i t o r. T h i s i s b e c a u s e , t h e Consolidated Financial Statements of a subsidiary will not lend itself fully towards the Consolidation requirements of the Holding Company directly. [e.g. Consolidated Financial Statements of Subsidiary Co. may not have all details required by Holding Co. – row items where related party transactions have been grouped; AS 18 disclosure may also have been grouped together and not individually reported;]. Hence, consolidation may need to happen afresh from a trial balance level with the aid of Reporting Pack. This is avoidable and may be eliminated by identical grouping of FS of all subsidiaries and holding company.
8.
Handling change in the effective control % from subsidiary to the holding company for the stepdown subsidiary where cross holding exists. A company which is an associate at a level may become a subsidiary at a different level – thereby changing the entire consolidation methodology.
case where there is divergence in consultation with individual companies. Enforcement of consistent accounting policies in Associate Companies / Joint Venture Companies may sometimes be a challenge since they may also like to align with the other Holding / JV Partner’s Holding Company (which may or may not be an Indian Company). Where accounting standards give option to companies to different sets of treatment (e.g. forex treatment for long term monetary items) different companies may have taken different approaches – alignment needs to be effected. RELATED PARTY TRANSACTIONS The related party identification is the bed-rock for the consolidation process : unrelated parties need not be consolidated! Related party transactions are critical in the Consolidation Process. The challenge is to identify them and ensure they match in the respective books (completeness of accounting within accounting timeframes) so that elimination of inter-company balances is done completely. Challenges: 1.
Identify the Related Party list for each and every Company (in consultation with the respective CFO / equivalent) so that the same is consistent across the Group of Companies. There could be situations where an entity is ‘related’ to one particular company but not to the subsidiary company.
2.
Design MIS structure wherein every company in the Group reports on its related party transactions in a pre-determined manner (format, timelines – say, quarterly) after due process of internal reconciliation with other re la te d p a rty e n ti ti e s. Th i s w ou ld a lso facilitate the Audit Committee / those charged with governance to review and approve related party transactions as required under the new statute rules / SEBI (listed companies).
SIGNIFICANT ACCOUNTING POLICIES It is imperative that the Accounting Policies of the Subsidiary Companies are consistent with (preferably identical) to the accounting policies of the Holding Company in order to have an effective compliance to the Consolidation requirements as per AS 21 and avoid audit comments in case of disparity. Comparison of the significant accounting policies, extent of disclosure of these policies is required as the First Step towards Consolidation Process. Task force should study the same and effect solutions in
MCA has given a notification on 14th October 2014 on the subject matter of Conaolidaiton of Financial Statements as per Companies Act, 2013 requirements: 1.
Basically this amendment postpones the necessity of Consolidation by a year to 31.3.2016 (but then 31.3.2015 may have to come as 'previous year' balance!!) for companies having only JVs and Associates but not having subsidiaries.
2.
This notification also exempts a holding company from preparing Consol FS, if it has another Holding Company (100% ownership) and this Holding Company is in India. Viz. if A is 100% holding company to B and B is 100% holding company to C; then, B need not prepare Consol FS provided A is in India. IF "A" is abroad, then B needs to prepare Consol FS. Please note, it is applicable only to 100% holding-subsidiary relationships. (continued on next page)
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AUDITOR • October 2014
(continued from previous page)
3.
4.
Provide for a centralised process to monitor the above process and trigger any corrective action required – this needs to be done at the highest Group level possible. Analyse reconciliations regularly and in a timely manner and facilitate passing of entries to eliminate reconciling items.
Notes to Accounts Different companies will have different types of notes to accounts. As a first time step towards consolidation, it is necessary to compare and contrast the notes to accounts of all companies in order to bring a consistent methodology and treatment of disclosure which will lend itself to better / easier consolidation. E.g. certain disclosures may be pre-fixed like ‘contingent liabilities’. The task force may develop a comprehensive “Model Illustrative set of Financial Statements” which can be used as guidance by all Group Companies. Benchmark practices for disclosure (e.g. segment reporting / AS 15) needs to be developed for Consolidated Financial Statements in line with Accounting Standards and current practices across business groups. Certain disclosures, currently not available in standalone financial statements may need to be introduced (either in MIS reporting pack or in the standalone FS itself) so that information is available for consolidation. FOREIGN ENTITIES Special care is to be taken while consolidating Foreign Entities: 1.
Determination of GAAP differences for foreign entities
2.
Determination of integral /non-integral classification for foreign entities
3.
Determination of reporting dates – if different from India reporting dates.
4.
Existence of adequate audit report to support in consolidation process [audit report of consolidated entity]
OTHER ASPECTS Other first time challenges would be dealing with harmonisation of chart of accounts across companies will help in easier and more accurate consolidation. This requires a lot of planning and analysis of accounting various transactions. Evaluation of capabilities / functionalities of accounting software with respect to consolidated financial statement should be done and implemented for consolidation. Separate module for preparation of CFS is available in SAP / Oracle. (Decision making authorities at group level may perhaps plan to get all the ‘material’ companies to u s e a n y s p e c i f i c E R P, t h e r e b y e a s i n g t h e consolidation process). At the same time, there are several stand-alone consolidation packages which will aid in automating the process. Other aspects like methodologies for preparation of cash flow statements, calculation of minority interest etc. [e.g. dealing with dividend declared by less-than-wholly-owned subsidiary – reduces cash] would also have to be built into the processes – these require a heavy dose o f theoretical knowledge. CONCLUSION The path towards Consolidated Financial Statements is not steep. All that is required is careful planning, execution to the smallest detail and a high degree of understanding the technical aspects of consolidation and disclosure requirements and working backwards to establish robust practices. This in turn will also strengthen the reporting of individual entities’ financial statements.
BB NAIDU STUDY CIRCLE MEETING – NOVEMBER 2014 Topic
: Accounting Standard 22 – Accounting for taxes on income :
Discussion, Analysis of Practical Issues and Case Studies Speaker
: CA. Kaushik Venkataraman VKAN & Associates, Chartered Accountants, Chennai
Date & Time
: Friday, the 21st November 2014 (6.00 p.m.)
(High Tea: 5.40 p.m.) AUDITOR • October 2014
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Indirect Tax Snippets Service Tax Construction of flats for individuals not taxable prior to July 1, 2010; no requirement to prove that serv ice tax has been paid to Government for claim of refund Prior to July 1, 2010, builders and developers were not liable to pay service tax on construction services provided to individuals who purchased flats/residential units in a residential complex. However for any claim of refund of the tax paid on such services, the period oflimitation under section 11B of the Excise Act would be applicable even when the levy is illegal and tax is collected without the sanction of law. There is no requirement that the buyers of goods/ services have to produce evidence to show that tax has been paid to the ‘Government’. ‘Relevant date’ for computation of limitation period would be date of payment for the service. Josh P John & Others v CST & Others [2014TIOL-1753-CESTAT-BANG] Cenvat credit relating to unregistered premises is not eligible Cenvat credit on insurance premium attributable to family members is not eligible. Cenvat credit on service tax paid on accident and medical insurance premium attributable to the family members would not be eligible as it does not have any direct nexus with the manufacture and will not qualify as ‘input services’. Sundaram Brake Linings vs CCE, Chennai [2014 (34) STR 583 (Tri – Chennai)] Bangalore Tribunal issues common order deciding on various issues relating to refund of Cenvat credit for export of services Bangalore Tribunal decided on various issues relating to refund claim under Rule 5 of the Cenvat Credit Rules, 2004. The Tribunal inter alia held the following (i) that the time limitation would apply for claim of refund for export of service and the date of export would be considered from the date of realisation of export consideration (ii) Registration is not a criteria for eligibility to refund, Cenvat credit is eligible prior to registration(ii) Eligibility of Cenvat credit on input services should be
CA Deabasis Nayak & Mr Satish Sarada determined subject to an integral nexus being established between the input services received and output services exported etc. Apotex Research Private Limited and Others vs CST, Bangalore [2014-TIOL-1836-CESTATBANG] Tribunal allows adjustment of service tax paid in wrong service tax registration number. The Tribunal allowed the adjustment ofthe service tax paid under the old service tax registration number of his partnership firm that was already dissolved on the ground that such wrong deposit was a clear mistake and there was no outstanding liability on the partnership firm. CCE &ST, Bhopal vs K KKedia [2014 (35) STR 383 (Tri – Delhi)] Services received prior to commencement of production is commercial activity / production Revenue denied exemption under Notification 9/2009-ST of March 3, 2009 to the assesse, a Special Economic Zone (“SEZ”) Unit by way of refund of service tax paid, on the ground that the taxpayer has not started manufacturing activity or authorised operation in the SEZ. Relying on the decision of the Kolkata Tribunal in the case of Cadila Health Care Ltd, the Tribunal held that services rendered prior to actual manufacture of final product is commercial activity/production and hence taxpayer would be eligible for the benefit of the exemption. CST vsZydus Technologies Ltd [2014 (35) STR 515 (HC – Gujarat) Larger bench of Tribunal allows extension of stay beyond a period of 365 days In cases where the period of 365 days has passed from the date of initial grant of stay but the appeal could not be disposed for reasons not attributable to the taxpayer and where the Tribunal is satisfied that taxpayer was ready for disposal of appeal and/ or had not indulged in any proactive strategies, the extension of stay could be granted beyond a period of 365 days by passing a speaking order and recording the appropriate reasons for the same. (continued on next page)
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AUDITOR • October 2014
(continued from previous page)
Chhattisgarh Distilleries Ltd & Others v CCE, Raipur [Interim Order No IO/ST/864884/2014-CU (DB) dated September 30, 2014 (Tribunal – New Delhi)] Penalty under section 78 not imposable if penalty under section 77 is waived Revenue dropped the demand of the penalty under section 77 of the Finance Act, 1994 (“Finance Act”), on the basis that the taxpayer is a small service provider and hence not expected to be well equipped and aware of the service tax legislation. However, penalty section 78 of the Finance Act was confirmed. Tribunal held that Revenue have clearly recorded the reasons of inability of the taxpayer and dropped the penalty under section 77, the findings equally cover the case in favour of the taxpayer for dropping of the penalty under section 78, as well. Smart Finance vs Commissioner of Central Excise, Jaipur [2014 TIOL 1410 HC DEL ST] Cenvat reversal under Rule 6(3A) of the Cenvat Rules applies to the total Cenvat credit The Mumbai Tribunal in a recent stay petition, departed from the stay order of Chennai Tribunal in Sify Technologies Ltd, has prima facie laid down that the formula prescribed under Rule 6(3A) of the Cenvat Rules applies to the total Cenvat credit on the input services during the financial year and not the total of the Cenvat credit taken on common input services. The Tribunal also observed that if the formula leads to an anomalous situation, the remedy lies in amending the provisions of the statute and the judiciary is helpless. Thyssenkrupp Industries (I) Pvt Ltd v CCE, Pune 2014-TIOL-1825-CESTAT-MUM VAT/ CST ‘Router’ is a computer peripheral and shall qualify as an information technology product liable to tax at the rate of four percent and not under the residuary category The Madras High Court (“HC”) by relying on the findings of Appellate Deputy Commissioner and Tribunal held that'router', from the nature of its use in conjunction with the computer is a ‘peripheral’ of a computer. Thus, the HC held that ‘router’ sold by the taxpayer is computer peripheral falling under S no 22 AUDITOR • October 2014
i.e.Computer systems, peripherals and parts, vide Entry no 68 relating to the list ‘information technology products’ of Part B of First Schedule to the TNVAT Act. State of Tamil Nadu v CMC Ltd [2014-VIL 273- MAD HC] VAT shall be levied at the rate of two percent on sale of unbranded food and drinks by a restaurant, not being a star hotel. The taxpayer who is running a star hotel in Mylapore has started a restaurant at ECR road which is away from the star hotel premises. In this regard, the AAR clarified that that the restaurant located at ECR is not attached to the star hotel premises and remains as a separate premises. Therefore, the sale of ready to eat unbranded food and drinks including sweets, savouries and non –alcoholic beverages would attract VAT at reduced rate of two percent under section 7(1)(b) of the TNVAT Act read with Notification II (1)/CTR/ (a-14)/2007 in GO Ms No 12 dated January 1, 2007 and Notification II (1)/ CTR/30/(a-2)/2012 in GO Ms no 32 dated March 10, 2012. Savera Industries Limited vide ACAAR No 42/2014-25 dated September 29, 2014. Set off / adjustment of excess payment of State sales tax against deficit in Central Sales Tax (“CST”) deposit of equivalent amount is permissible. Taxpayer made an excess payment of sales tax under the West Bengal Sales Tax Act, 1994 and accordingly there was an equal amount of short payment under payment of CST. Thus, the taxpayer sought for set off or an adjustment of the excess payment of State sales tax against the deficit of CST. Accordingly, Calcutta HC held that the short payment of CST with corresponding increased payment of State sales tax does not reduce gross credit in the fund, hence if the taxpayer wants adjustment / set-off, it must be readily granted without insisting on formalities. The HC also held that separate levy and collection of both taxes does not matter, if they are credited to same fund, it creates a gross credit in the consolidate fund in the State. Hindustan Unilever Limited vs. Deputy Commissioner, Commercial Taxes & Others [Source: Taxsutra.com]
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Old Madras Road
CA Karthik A. Bhatt
Saraswathi Stores
Swadeshi Type Foundry
The name of A.V.Meiyappa Chettiar is inseparable from the history of Tamil cinema. Born in 1907, into a Natukottai Nagarathar family, Meiyappa Chettiar’s first exposure to business was thanks to his family run venture,a mini department store named AV and Sons. The business also sold gramophone records. The entrepreneur in Meiyappa Chettiar decided to get into the production of gramophone records, instead of just marketing them. Thus was born Saraswathi Stores.
Not much is known today about this business, which was founded in 1906 by T.Arumugam Mudaliar with the head office at No.51, Guruvappa Chetty Street, Chintadripet. The foundry was inaugurated by none other than the l e g e n d a r y V. O . C h i d a m b a r a m Pi l l a i , t h e kappalottiya thamizhan. Over time, the business opened branches at Bangalore and Hyderabad.
Saraswathi Stores tied up with the Odeon label to market their records here. Several top Carnatic musicians such as Ariyakudi Ramanuja Iyengar entered into exclusive contracts with Odeon. They recorded dialogues of entire stage plays with songs and also had an in house orchestra in attendance to re-record film songs exclusively for discs. Their showroom was in Mount Road, where today the DBS building stands.
A brochure published in the 1960s gives us some information about its functioning. According to it, their “Swadesi Home” label produced types in fifteen languages (which included Sinhalese, Devanagari and Grantham!!). The firm was also the inventor of the famous “Ganapathy Tamil Series”. It was an approved contractor to the Government of India, even supplying election blocks for various State elections such as the 1962 Gujarat and Bihar Assembly Elections, the 1967 Bihar Elections etc.
Long after the gramophone era, Saraswathi Stores remained a popular destination for cassettes till the 1990s, when it slowly faded out. Today, the name still stands, thanks to the small outlet run in Alwarpet, next to Sankara Hall.
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AUDITOR • October 2014
Recent Judicial Decisions Reported
P.M. Veeramani, FCA
Statute: Income Tax Act – Sec.4 – Dividend on chit subscription Decision in favour of : Revenue Title: V. Rajkumar vs CIT Citation: 103 DTR 395 Bench: Chennai HC Assessee being a subscriber to the chit scheme, it is difficult to draw the principle of mutuality to hold that the surplus received as by way of dividend was merely distribution of what was contributed by the assesse. Dividend income received over and above what had been subscribed by the assesse was assessable as income of the assessee Statute: Income Tax Act – Sec.6 – Over stay in India Decision in favour of : Assessee Title: Suresh Nanda vs ACIT Citation: 31 ITR Trib 620 Bench: ITAT Delhi Stay in India exceeding 182 days due to illegal impounding of passport. Period from impounding of passport till release to be excluded while counting number of days stay in India for determining residential status. Statute: Income Tax Act – Sec.10A – customization of Decision in favour of : Assessee software abroad Title : JVH Solutions vs ITO Bench: ITAT Hyderabad Citation: 103 DTR Trib 414 Assessee was entitled to exemption in respect of receipts towards development of telecom billing software and deployment of its trained personnel for installing, maintaining and customizing such software under an agreement with overseas company even though the fees was on the basis of man hours spent by professionals. Customised software is a different product from the original standard software after passing through cumbersome process of customization and would certainly fall under the term ‘produce’ for the section. Statute: Income Tax Act – Sec.11, 68 – Donations not unexplained credits Decision in favour of : Assessee Title : CIT vs Uttaranchal Welfare Society Citation: 364 ITR 398 Bench: Allahabad HC Section 68 was not applicable since the assessee had disclosed donations in its income and expenditure account and all the receipts, other than corpus donations, were declared as income in the hands of the assesse and thus there was a full disclosure of the income. It was also not in dispute that the objects and of the assesse were charitable and hence it was eligible for exemption under section 11on such donations. Statute: Income Tax Act – Sec.54F – sale of land in the Decision in favour of : Assessee name of wife Title: Hardev Singh vs ITO Citation: 63 SOT 203; 45 taxmann.com 32 Bench: ITAT Chandigarh AO rejected claim for exemption since land sold was in the name of wife whereas new property was purchased in the name of assesse. Since profit on sale of sale of land in the name of wife is assessed in the hands of the assesse, he is also eligible for exemption. Statute: Income Tax Act – Sec.55(2)(a) – Goodwill on sale of Decision in favour of: Assessee profession Title: Dr. K. Premraj vs DCIT Citation: 149 ITD 339 / 41 taxmann.com 81 Bench: ITAT Chennai Assessee doctor agreed to transfer his existing clientele to a new entity and in lieu of transferring his reputation and goodwill received a particular sum. Agreement did not mention that assessee could not practice individually or compete with new entity. In profession goodwill is gained by an individual from his personal skill and experience which he gains over a period of time. The sale of goodwill in the present case is a capital receipt out of his profession and did not come within the ambit of section 55(2)(a). Statute: Income Tax Act – Sec.68 – Credit in partners account Decision in favour of : Revenue Title: Mukand Cold Storage vs CIT Citation: 104 DTR 241 Bench: Punjab & Haryana HC Money introduced in the names of the partners was in fact income earned by the firm in the business of its cold storage and addition in the hands of the firm is sustainable as no material had been produced to show that the partners had independent source of income. Statute: Income Tax Act – Sec.147 – Re-opening cases Decision in favour of : Assessee under 143(1) Title: Mohan Gupta vs CIT Citation: 104 DTR 186 Bench: Delhi HC The observations made by SC in the case of Rajesh Jhaveri on the difference between “assessment” and “intimation” are relied on by the revenue. It was rendered in the context that where an intimation is issued under 143(1) , there is no opportunity to the AO for form an opinion and therefore when its finality is sought to be disturbed by issuing under section 148, said proceedings cannot be challenged on the ground of “change of opinion”. SC has made it clear that “so long as the ingredients of section 147 are fulfilled” an intimation can be subjected to re-opening. Therefore, the reasons must indicate specifically what objective materials are, on the basis of which a re-opening is initiated and it should meet the standards under section 148 Statute: Income Tax Act – Sec.199 – Credit for TDS / 26 AS Decision in favour of : Assessee Title : LSG Skychef India Private Ltd vs DCIT Citation: 148 ITD 367 Bench: ITAT Mumbai Form 26AS is a statement generated at the end of the revenue and assesse cannot be in any manner be held responsible for any discrepancy therein or for non-matching of TDS reflected therein with assessee’s claim. Assessee by furnishing TDS certificates bearing full details of TDS had discharged primary onus towards claiming credit and according AO directed to allow credit.
AUDITOR • October 2014
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THE SOCIETY OF AUDITORS (Regd.), Shop No.33, TNHB Shopping Complex, 4/180, Luz Church Road, Mylapore, CHENNAI 600004. Ph: 24986979 &
THE CHARTERED ACCOUNTANTS STUDY CIRCLE (Regd.), 2-L, Rear Block, 22-A, Cathedral Road, Chennai 600006. Ph: 28114283
are jointly organising a
One Day Programme on CONSOLITATION OF FINANCIAL STATEMENTS ON SATURDAY THE 15TH NOVEMBER 2014 TIMING: 9.30 A.M to 5.00 P.M VENUE: Hotel Days Inn Deccan, Royapettah High Road, Royapettah, Chennai 600014 RUSH YOUR REGN. AS WE HAVE CAPACITY LIMITATION. (180 SEATS ONLY) About the Programme As per Section 129 (3), every company having one or more subsidiaries shall prepare consolidated financial statements (CFS) apart from its stand-alone financial statement which shall also be laid in the Annual General Meeting. For this purpose, the term subsidiary shall include an associate or a joint venture. While AS 21 deals with the principles involved in Consolidation of Financial Statements, AS 23 deals with accounting of Investment in Associates in Consolidated Financial Statements and AS 27 covers Financial Reporting of Interests in Joint Ventures. AS 18 is also relevant as it discloses the related party transactions, the bedrock for triggering the consolidation requirement Since the Companies Act 2013 has widened the necessity of consolidation of Financial Statements from its present requirement of only for Listed Companies, many business groups / private companies having establishments abroad in the form of a separate entity controlled by the Indian Holding Company would need to prepare themselves for this exercise and adhere to the compliance aspects. The Consolidated Financial Statements are also subject to scrutiny by MCA for adequacy of disclosure therein. The accounting and finance teams of the above companies (not only the holding companies requiring consolidation but also the subsidiaries / joint ventures / associates) would have to understand the prerequirements for this consolidation exercise and plan for the same. This gains more importance in the first time implementation. From an auditor’s perspective, there are no separate reporting requirements for CFS and hence, the reporting standards of standalone need to be applied. The differences from International Reporting Practices also need to be understood (e.g. quantification of components in the CFS not audited by the Reporting Auditor but by another auditor). Auditors would also need to expand their audit practices to include steps towards certifying CFS. Information / Group Audit packs would also be required to be developed by Companies in consultation with their Auditors which will help in smoother availability of information for consolidation. There could be a process of certifying these information (apart from standalone FS) to aid consolidation and reporting thereon. Hence as a starter we jointly are organizing as one day seminar on understanding some of the important aspects of the process for Consolidation of Financial Statements. We are absolutely sure that by attending this Programme, you will definitely reap the benefits to enrich your knowledge on the said subject and in turn will perform the task more efficiently and ethically. We request you to register well-in-advance to enable us to make proper facilities. In case you require further clarification relating to the program or want the speakers to address any specific issues relating to the above subjects, please free to contact the under-mentioned Programme coordinators preferably by mail. As the hall has a limited capacity the delegates have to be restricted to 180. Name CA. Mahesh Krishnan CA. K.R. Sathyanarayanan 14
Program Co-ordinators Mobile 9840332523 9840118712
Email ID maheshkrishnan@rgnprice.com sai_sathiya@yahoo.com AUDITOR • October 2014
PROGRAM SCHEDULE Topic
Timings
Registration
09.00 am To 9.30 am
Welcome Address / Overview of Programme
9.30 am To 9.45 am
Consolidation of Financial Statements
9.50 am To 1.00 pm
Tea Break
11.00 am To 11.15 am Lunch 1.00 pm To 2.00 pm
Related Party / Auditor’s Perspectives on Consolidation And Reporting
2.00 pm To 3.15 pm
Speakers
CA. M.P. Vijay Kumar
CA. Chinnsamy Ganesan
Tea Break 3.30 pm To 3.45 pm Consolidation of Associates / Joint Ventures
03.45 pm To 5.00 pm
CA. Geetha Jayakumar
Delegate Fee: Rs.1250/- (including Service Tax) Kindly register yourself by paying Registration Fees through Cheque/DD Payable at Chennai in favour of “The Chartered Accountants Study Circle”. Please Register on or before 31/10/2014 so as to enable us to make appropriate arrangements.
Registration Form From
To The Chartered Accountants Study Circle, 2l Rear Block, 22 Cathedral Road (next To Stella Maris College) Chennai 600 006. Dear Sirs, I/we would like to register the following Delegate/Delegates for the Programme on Companies Act 2013 and the necessary details are as under: Sl. No.
Name
Email ID
Telephone Number
1 2 3 4 5 Address for Communication to the Delegates:
The necessary delegate fee is herewith enclosed vide Cheque / DD No. ________________ Dated _____________ drawn on _____________________________________, _________________ Branch. Yours Truly, Note : 1. Delegate Fee at the rate of Rs.1250- per Delegate to be drawn in favour of “The Chartered Accountants Study Circle’. For additional delegates, Kindly take xerox of this form and use the same. 2. The Delegate Fees includes Service Tax, Cost of Material (if any), refreshments and lunch. (continued on next page)
AUDITOR • August-September 2014
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With Best Wishes From