Pros and Cons of Adopting IFRS

Pros and Cons of Adopting IFRS as Indian Standards

The use of international financial reporting standards (IFRS) as a universal financial reporting language is gaining momentum across the globe. ICAI has released a concept paper on Convergence with IFRS in India, detailing the strategy for adoption of IFRS in India with effect from April 1, 2011. This has been strengthened by a recent announcement from the ministry of corporate affairs (MCA) confirming the agenda for convergence with IFRS in India by 2011.
Even in the US there is an ongoing debate regarding the adoption of IFRS replacing US-GAAP.
Adopting IFRS by Indian corporates is going to be very challenging but at the same time could also be rewarding.
There are likely to be several benefits to corporates:
Improvement in comparability of financial information and financial performance with global peers and industry standards.
The adoption of IFRS is expected to result in better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements.
This will lead to increased trust and reliance placed by investors, analysts and other stakeholders in a company’s financial statements.
Better access to and reduction in the cost of capital raised from global capital markets since IFRS are now accepted as a financial reporting framework.
A recent decision by the US Securities and Exchange Commission (SEC) permits foreign companies listed in the US to present financial statements in accordance with IFRS. This means that such companies will not be required to prepare separate financial statements under Generally Accepted Accounting Principles in the US (US GAAP).
Therefore, Indian companies listed in the US would benefit from having to prepare only a single set of IFRS compliant financial statements, and the consequent saving in financial and compliance costs.

disadvantages:-However, the perceived benefits from IFRS adoption are based on the experience of IFRS compliant countries in a period of mild economic conditions. The current decline in market confidence in India and overseas coupled with tougher economic conditions may present significant challenges to Indian companies.
IFRS requires application of fair value principles in certain situations and this would result in significant differences from financial information currently presented, especially relating to financial instruments and business combinations.
Given the current economic scenario, this could result in significant volatility in reported earnings and key performance measures like EPS and P/E ratios.
Indian companies will have to build awareness amongst investors and analysts to explain the reasons for this volatility in order to improve understanding, and increase transparency and reliability of their financial statements.
This situation is worsened by the lack of availability of professionals with adequate valuation skills, to assist Indian corporates in arriving at reliable fair value estimates. This will render some of the benefits of IFRS adoption ineffective.

Please Visit the Blog : International Financial Reporting Standards

SOX

Summary of SOX
The Act has 11 Titles.
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) SHORT TITLE.—This Act may be cited as the ‘‘Sarbanes-Oxley Act of 2002’’.
(b) TABLE OF CONTENTS.—The table of contents for this Act is as follows:
Sec. 1. Short title; table of contents.
Sec. 2. Definitions.
Sec. 3. Commission rules and enforcement.
TITLE I—PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
Sec. 101. Establishment; administrative provisions.
Sec. 102. Registration with the Board.
Sec. 103. Auditing, quality control, and independence standards and rules.
Sec. 104. Inspections of registered public accounting firms.
Sec. 105. Investigations and disciplinary proceedings.
Sec. 106. Foreign public accounting firms.
Sec. 107. Commission oversight of the Board.
Sec. 108. Accounting standards.
Sec. 109. Funding.
Section 2: SOME DEFINITIONS
AUDIT COMMITTEE
(A) a committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer; and
(B) If no such committee exists with respect to an issuer, the entire board of directors of the issuer.
BOARD. - The term ‘‘Board’’ means the Public Company Accounting Oversight Board established under section 101.
COMMISSION. - The term ‘‘Commission’’ means the Securities and Exchange Commission.
ISSUER. - The term ‘‘issuer’’ means an issuer (as defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c)), the securities of which are registered under section 12 of that Act (15 U.S.C. 78l), or that is required to file reports under section 15(d) (15 U.S.C. 78o(d)), or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933 (15 U.S.C. 77a et seq.), and that it has not with drawn.
PUBLIC ACCOUNTING FIRM. - The term ‘‘public accounting firm’’ means -
(A) a proprietorship, partnership, incorporated association, corporation, limited liability company, limited liability partnership, or other legal entity that is engaged in the practice of public accounting or preparing or issuing audit reports; and
(B) to the extent so designated by the rules of the Board, any associated person of any entity described in subparagraph (A).
TITLE I - PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
SEC. 101. ESTABLISHMENT; ADMINISTRATIVE PROVISIONS.
There is established the Public Company Accounting Oversight Board, to oversee the audit of public companies that are subject to the securities laws, and related matters, in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies the securities of which are sold to, and held by and for, public investors. The Board shall be a body corporate, operate as a nonprofit corporation, and have succession until dissolved by an Act of Congress.
DUTIES OF THE BOARD. - The Board shall, subject to action by the Commission under section 107
register public accounting firms,
establish or adopt, or both, by rule, auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers
conduct inspections of registered public accounting firms
conduct investigations and disciplinary proceedings concerning, and impose appropriate sanctions where justified upon, registered public accounting firms and associated persons of such firms,
perform such other duties or functions as the Board determines are necessary or appropriate to promote high professional standards among, and improve the quality of audit services offered by, registered public accounting firms and associated persons thereof
enforce compliance with this Act, the rules of the Board, professional standards, and the securities laws
set the budget and manage the operations of the Board
BOARD MEMBERSHIP. -
(1) COMPOSITION. - The Board shall have 5 members, appointed from among prominent individuals of integrity and reputation who have a demonstrated commitment to the interests of investors and the public, and an understanding of the responsibilities for and nature of the financial disclosures required of issuers under the securities laws and the obligations of accountants with respect to the preparation and issuance of audit reports with respect to such disclosures
(2) Each member of the Board shall serve on a full-time basis and will not be employed by any other person or engage in any other professional or business activity.
SEC. 102. REGISTRATION WITH THE BOARD.
A public accounting firm has to apply for registration to the PCAOB.

CONTENTS OF APPLICATIONS.-Each public accounting firm shall specify the following in its application:
(A) the names of all issuers for which the firm prepared or issued audit reports during the immediately preceding calendar year, and for which the firm expects to prepare or issue audit reports during the current calendar year;
(B) the annual fees received by the firm from each such issuer for audit services, other accounting services, and non-audit services, respectively;
(C) such other current financial information for the most recently completed fiscal year of the firm as the Board may reasonably request;
(D) a statement of the quality control policies of the firm for its accounting and auditing practices;
(E) a list of all accountants associated with the firm who participate in or contribute to the preparation of audit reports, stating the license or certification number of each such person, as well as the State license numbers of the firm itself;
(F) information relating to criminal, civil, or administrative actions or disciplinary proceedings pending against the firm or any associated person of the firm in connection with any audit report;
(G) copies of any periodic or annual disclosure filed by an issuer with the Commission during the immediately preceding calendar year which discloses accounting disagreements between such issuer and the firm in connection with an audit report furnished or prepared by the firm for such issuer; and
(H) such other information as the rules of the Board or the Commission shall specify as necessary or appropriate in the public interest or for the protection of investors.
SEC. 103. AUDITING, QUALITY CONTROL, AND INDEPENDENCE STANDARDS AND RULES.
The Board shall, by rule, establish, including, to the extent it determines appropriate, through adoption of standards proposed by the designated professional groups of accountants and amend or otherwise modify or alter, such auditing and related attestation standards, such quality control standards, and such ethics standards to be used by registered public accounting firms in the preparation and issuance of audit report.
It shall include in the auditing standards requirements that each registered public accounting firm shall:
prepare, and maintain for a period of not less than 7 years, audit work papers, and other information related to any audit report, in sufficient detail to support the conclusions reached in such report;
provide a concurring or second partner review and approval of such audit report (and other related information), and concurring approval in its issuance, by a qualified person
describe the scope of the auditor’s testing of the internal control structure and procedures of the issuer,
shall include, in the quality control standards that it adopts requirements for every registered public accounting firm relating to -
(i) monitoring of professional ethics and independence from issuers on behalf of which the firm issues audit reports;
(ii) consultation within such firm on accounting and auditing questions;
(iii) supervision of audit work;
(iv) hiring, professional development, and advancement of personnel;
(v) the acceptance and continuation of engagements;
(vi) internal inspection; and
(vii) such other requirements as the Board may prescribe
Section 104: INSPECTIONS OF REGISTERED PUBLIC ACCOUNTING FIRMS
The Board shall conduct a continuing program of inspections to assess the degree of compliance of each registered public accounting firm and associated persons of that firm with this Act, the rules of the Board, the rules of the Commission, or professional standards, in connection with its performance of audits, issuance of audit reports, and related matters involving issuers.
INSPECTION FREQUENCY. -
Inspections shall be conducted annually for firms that audits more than 100 issuers; and not less frequently than once every 3 years for others. The SEC and/or the Board may order a special inspection of any firm at any time.
CONDUCT OF INSPECTIONS. - In conducting an inspection the Board shall -
(1) inspect and review selected audit and review engagements of the firm
(2) evaluate the sufficiency of the quality control system of the firm, and the manner of the documentation and communication of that system by the firm; and
(3) perform such other testing of the audit, supervisory, and quality control procedures of the firm as are necessary
RECORD RETENTION. - The rules of the Board may require the retention by registered public accounting firms for inspection purposes of records whose retention is not otherwise required by
SEC. 105. INVESTIGATIONS AND DISCIPLINARY PROCEEDINGS.
The Board shall establish, fair procedures for the investigation and disciplining of registered public accounting firms and associated persons of such firms.
(b) INVESTIGATIONS. -
(1) AUTHORITY. - The Board may conduct an investigation of any act or practice, or omission to act, by a registered public accounting firm, any associated person of such firm, or both, that may violate any provision of this Act, the rules of the Board, the provisions of the securities laws and the obligations and liabilities of accountants with respect thereto.
(2) TESTIMONY AND DOCUMENT PRODUCTION. - In addition to such other actions as the Board determines to be necessary or appropriate, the rules of the Board may -
(A) require the testimony of the firm or of any person associated with firm.
(B) require the production of audit work papers and any other document or information in the possession of a registered public accounting firm or any associated person thereof and may inspect the books and records of such firm or associated person.
(C) request the testimony of, and production of any document in the possession of, any other person, including any client of a registered public accounting firm that the Board considers relevant or material to an investigation
(D) provide for procedures to seek issuance by the Commission of a subpoena to require the testimony of, and production of any document in the possession of, any person, that the Board considers relevant or material to an investigation.
CONFIDENTIALITY All documents and information prepared or received by the Board shall be "confidential and privileged as an evidentiary matter (and shall not be subject to civil discovery other legal process) in any proceeding in any Federal or State court or administrative agency unless and until presented in connection with a public proceeding or [otherwise] released" in connection with a disciplinary action. However, all such documents and information can be made available to the SEC, the U.S. Attorney General, and other federal and appropriate state agencies.
(c) DISCIPLINARY PROCEDURES. -
In any proceeding by the Board to determine whether a registered public accounting firm, or an associated person thereof, should be disciplined, the Board shall bring specific charges, notify such firm or associated person of, and provide them an opportunity to defend against, such charges; and keep a record of the proceedings.
SANCTIONS. - If a firm or associated person thereof has engaged in any act or practice, or omitted to act, in violation of this Act, the rules of the Board, the provisions of the securities laws the Board may impose such disciplinary or remedial sanctions including:
(A) temporary suspension or permanent revocation of registration
(B) temporary or permanent suspension or bar of a person from further association with any registered public accounting firm;
(C) temporary or permanent limitation on the activities, functions, or operations of such firm
(D) a civil money penalty for each such violation,
(E) censure;
(F) required additional professional education or training; or
(G) any other appropriate sanction
(5) INTENTIONAL OR OTHER KNOWING CONDUCT. - The sanctions and penalties shall only apply to -
(A) intentional or knowing conduct, including reckless conduct, that results in violation of the applicable statutory, regulatory, or professional standard; or
(B) repeated instances of negligent conduct, each resulting in a violation of the applicable statutory, regulatory, or professional standard.

SEC. 106. FOREIGN PUBLIC ACCOUNTING FIRMS.
(a) APPLICABILITY TO CERTAIN FOREIGN FIRMS. -
Any foreign public accounting firm that prepares or furnishes an audit report with respect to any issuer, have to get registered.
BOARD AUTHORITY. - The Board may determine that a foreign public accounting firm (or a class of such firms) that does not issue audit reports nonetheless plays such a substantial role in the preparation and furnishing of such reports for particular issuers, should be treated as a public accounting firm (or firms) for purposes of registration under, and oversight by the Board in accordance with.
PRODUCTION OF AUDIT WORKPAPERS. -
(1) CONSENT BY FOREIGN FIRMS. - If a foreign public accounting firm issues an opinion or otherwise performs material services upon which a registered public accounting firm relies in issuing all or part of any audit report or any opinion contained in an audit report, that foreign public accounting firm shall be deemed to have consented -
(A) to produce its audit work papers for the Board or the Commission in connection with any investigation
(B) to be subject to the jurisdiction of the courts of the United States for purposes of enforcement of any request for production of such work papers.
CONSENT BY DOMESTIC FIRMS. - A registered public accounting firm that relies upon the opinion of a foreign public accounting firm, shall be deemed -
(A) to have consented to supplying the audit work papers of that foreign public accounting firm in response to a request for production by the Board or the Commission; and
(B) to have secured the agreement of that foreign public accounting firm to such production, as a condition of its reliance on the opinion of that foreign public accounting firm.
SEC. 107. COMMISSION OVERSIGHT OF THE BOARD.
GENERAL OVERSIGHT RESPONSIBILITY. - The Commission shall have oversight and enforcement authority over the Board, as provided in this Act and authority to amend rules of the Board
NOTICE OF SANCTION. - The Board to notify the Commission of any final sanction on any registered public accounting firm or on any associated person thereof.
REVIEW OF SANCTIONS. - The Board's findings and sanctions are subject to review by the SEC.
The SEC may enhance, modify, cancel, reduce, or require remission of such sanction.
Section 108: Accounting Standards.
The SEC is authorized to "recognize, as 'generally accepted' for purposes of the securities laws, any accounting principles" that are established by a standard-setting body that meets the bill's criteria, which include requirements that the body: (1) be a private entity;
(2) be governed by a board of trustees (or equivalent body), the majority of whom are not or have not been associated persons with a public accounting firm for the past 2 years;
(3) be funded in a manner similar to the Board;
(4) have adopted procedures to ensure prompt consideration of changes to accounting principles by a majority vote;
(5) consider, when adopting standards, the need to keep them current and the extent to which international convergence of standards is necessary or appropriate.

IAS-2 (TECHNICAL SUMMARY)

Technical Summary

This extract has been prepared by IASC Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards. IAS 2 Inventories
The objective of this Standard is to prescribe the accounting treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be recognised as an asset and carried forward until the related revenues are recognised. This Standard provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.
Inventories shall be measured at the lower of cost and net realisable value.
Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
The cost of inventories shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formula. An entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified. However, the cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs.
When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

Auditing Standard on Related Parties

IAASB Issues Auditing Standard on Related Parties; Makes Further Progress on Clarity Standards
New York July 14, 2008
Following the consideration and approval of due process by the Public Interest Oversight Board (PIOB), the International Auditing and Assurance Standards Board (IAASB), an independent standard-setting board under the auspices of the International Federation of Accountants (IFAC), today released International Standard on Auditing (ISAs) 550 (Revised and Redrafted), Related Parties and three clarity redrafted ISAs.
Related PartiesThe involvement of related parties in major corporate scandals encouraged the IAASB to revise its current auditing standard on the subject. The revised Related Parties standard clarifies the meaning of "related party" for purposes of an audit. It also makes clear the auditor's responsibility to obtain sufficient evidence about the required accounting and disclosure of related party relationships and transactions and to understand how such relationships and transactions affect the view given by the financial statements.
"The standard will strengthen current auditing practice in this area by emphasizing the need for the auditor to understand related party relationships and transactions in order to identify the risks of material misstatement to which these may give rise, and directing the auditor to focus work effort on the assessed risks of material misstatement, including those due to fraud," explains John Kellas, IAASB Chairman.
"The revised standard clarifies the auditor's responsibilities in those cases where the financial reporting framework establishes minimal or no related party requirements. In addition, it provides enhanced guidance to assist the auditor in understanding and responding to the risks of material misstatement that may arise in relation to related parties with dominant influence," emphasizes Kellas.
Clarity Redrafted ISAsIn addition to ISA 550 (Revised and Redrafted), the IAASB has also released the following clarity redrafted ISAs:
ISA 250 (Redrafted), Consideration of Laws and Regulations in an Audit of Financial Statements;
ISA 510 (Redrafted), Initial Audit Engagements-Opening Balances; and
ISA 570 (Redrafted), Going Concern.
They form part of the IAASB's ambitious 18-month program to redraft existing standards following the clarity drafting conventions.* To date, the IAASB has released 15 final clarity redrafted ISAs. The IAASB is on track to finalize its complete set of clarified ISAs by the end of this year.
The complete set of clarified ISAs, including newly revised standards such as ISA 550 (Revised and Redrafted), will be effective for audits of financial statements for periods beginning on or after December 15, 2009.
The ISAs can be downloaded free-of-charge from the IFAC online bookstore at http://www.ifac.org/store.
About the IAASB and IFACThe objective of the IAASB is to serve the public interest by setting high quality auditing and assurance standards and by facilitating the convergence of international and national standards, thereby enhancing the quality and uniformity of practice throughout the world and strengthening public confidence in the global auditing and assurance profession. The Public Interest Oversight Board oversees the activities of the IAASB and, as one element of that oversight, establishes its due process and working procedures.
IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 157 members and associates in 123 countries and jurisdictions, representing more than 2.5 million accountants in public practice, education, government service, industry and commerce. In addition to setting international auditing and assurance standards through the IAASB, IFAC, through its independent standard-setting boards, sets international ethics, education, and public sector accounting standards. It also issues guidance to encourage high quality performance by professional accountants in business.
* Key elements of the clarity drafting conventions include: establishing an objective for the auditor with respect to the subject matter of each standard; clearly distinguishing requirements from guidance on their application; avoiding ambiguity through eliminating the present tense to describe actions by the auditor and using more imperative language where a requirement was intended; and other structural and drafting improvements to enhance the overall readability and understandability of the standards.
[Source: IFAC]
ABHASH KUMAR
MEMEBR JAB WE MET CA

REDEFINING PROFESSIONALISM........

IAS-2 ( TECHNICAL SUMMARY)

Technical Summary

This extract has been prepared by IASC Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards. IAS 2 Inventories
The objective of this Standard is to prescribe the accounting treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be recognised as an asset and carried forward until the related revenues are recognised. This Standard provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.
Inventories shall be measured at the lower of cost and net realisable value.
Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
The cost of inventories shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formula. An entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified. However, the cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs.
When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

Secured Loans

Different forms of Secured Loans and AUDIT
Funds of an entity could be either own funds or owed funds. Borrowings are categorized as loans.
Loan is a one-time receipt from the lender (which may be released in installments as in the case of factory buildings, civil works, plant and machinery, etc.). Loans are to be within the borrowing powers of the company as per the Companies Act.
Loans of a company can be:

From institutional lenders such as banks, IDBI, IFCI, etc., which are secured.
From small investors, such as fixed deposits from public which are unsecured.
Debentures, which may be either secured or unsecured
Inter-corporate deposits, which are from other companies, which may or may not be under the same management

What is a security?
A security is a tangible asset, current or fixed, which is given to the custody of the lender with a stipulation that the lender could dispose of the security and appropriate the proceeds in case of default in repayment. A loan could be fully or partly secured.

Security of a current asset

In the case of a pledge, the lender has possession of the asset charged, which would be released only on payment of the dues. In the case of hypothecation, the possession is with the borrower, with a stipulation that the lender can seize the asset upon failure to repay the loan. The lender exercises a lien over the asset.
Loan against gold, NSCs, fixed deposits of bank, shares of companies, etc., are loans on pledge. All these are given to the custody of the lender, who will release the asset only on repayment in full of the amount borrowed.
Loans against vehicles, personal loans for purchase of durables, such as televisions, air-conditioners, etc., are loans on hypothecation. The borrower has possession of these goods.
Security of immovable property
An immovable property is secured by way of a mortgage, which could be an equitable mortgage (simple deposit of title deeds with the lender) or a registered mortgage, where the mortgage deed is to be registered with the registrar of assurances.
A guarantee is an assurance given by a third party to the contract that he would pay the amount if the principal borrower fails to pay.
There is nothing tangible given to the custody of the lender. Therefore, the loan against a guarantee does not constitute a secured loan. Loans against guarantees be it even by the Government, have to be shown under the head unsecured loans and not secured loans.
When an asset is given to the custody of the lender, the asset is said to be charged to the lender. The lender gets the right on the asset upon failure of the borrower to repay the loan. The charge can be a first/second charge or a pari passu charge.

Charge on an asset
In the case of first charge, the lender gets absolute right on the security. Any surplus from the sale of the asset should be turned over to the borrower.
In the case of the second charge the lender gets the right on the asset after satisfying the first lender. Any surplus after satisfying his claim should be turned over to the borrower.
Pari passu charge gives a parallel proportionate right to the lenders. Realization of the asset should be shared in proportion to the balances outstanding to the respective lenders.
Company law requirements

Registration of charge: Law requires any such charges on assets to be registered. Creation of charge is to be registered with the Registrar of Companies (RoC) within 30 days from the date of such creation or such extended time as permitted by the RoC. Such a registration secures the position of the lender. It is in the interest of the lender to ensure that the charge is registered. If the charges are not registered, the lender cannot enforce his charge on the asset.
Disclosure: Where a loan is disclosed as a secured loan, the details and nature of security should also be disclosed. If the loan is further secured by the personal guarantee of any of the directors, the fact should also be stated.
AS 10 provides an option to disclose the amount due to the hire vendor either as a deduction from the cash price of the asset or alternately as a secured loan.

Audit requirements: Section 227(1A) casts a responsibility on the auditors regarding such secured loans as well. Where a loan is disclosed as a secured loan, the auditor should ensure that the loan is properly secured.
To ensure that the loan is properly secured, the auditor has to carry out the following procedures:
Examine the document of loan for the nature and extent of security.
Obtain a letter from the lender that to the effect that the asset is held by them as a security.
Check the certificate of registration of charge (Forms 8 and 13).
Insist upon a management representation to this effect.
Verify the register of charges that this security is registered with the RoC and entered in this register.
Check the disclosure under secured loans.
Interest on secured loans
Disclosure of interest on secured loans is tricky. When interest is due and payable, it is a current liability and shown as such. But if it becomes overdue, the lenders can extend their charge on the interest also and consequently the amount gets merged with the secured loans. Since interest is not compounded, it cannot be shown as an addition to the loan but as a separate item.
Consider a company having secured debentures on which interest is payable on the first day of July and January every year. In the balance sheet as on March 31, 2XX6, interest payable for the broken period from January 1 to March 31, 2XX6 should be disclosed under current liabilities. In case interest due on January 1, 2XX6 also remains unpaid, that amount due from July 1, 2XX5 to January 1, 2XX6 should be disclosed along side secured debentures under the head secured loans but not as an addition to secured debentures.
Audit of secured loans
The auditor should verify the minutes of the board meeting for raising a loan.
Ensure that the loan is within the borrowing powers or a specific resolution passed by the general body for raising such loans.
Vet the loan documents of secured loan to understand the terms of loan such as installment payable, rate of interest, details of security.
Vouch the disbursement of loan with reference to the entries in the books of account and account copy from the lender.
If the repayment is by way of an EMI or such other fixed amount, calculate the split out of the amount between principal and interest and account for the same accordingly.
Calculate interest on loan as per the terms of the loan both with reference to the rate and the period. If the sanction says the interest is at quarterly or half-yearly rests, calculations should be made accordingly.
Examine whether interest is disclosed as per the requirements of law.
Ensure that the loan is disclosed only at the principal outstanding and that the nature of security is also mentioned.
To comply with CARO requirement, trace the usage of loan and ensure that it is used only for the purpose for which it was intended. Verify receipts issued by the payee for all the payments out of this loan. Obtain a management representation to this effect.
Source:
Business Line, Monday, May 21, 2007

compiled by ABASH

MEMBER OF JAB WE MET CA

REDEFINING PROFESSIONALISM..............

Agriculture needs an accounting standard

As biological assets are subject to droughts, floods and diseases the unrealised gains arising from changes in fair value can give a distorted picture of the financial results of the agricultural enterprise.

In India, there is no accounting standard on biological assets and agricultural produce. Accounting Standard on agriculture is the need of the hour as many Indian companies are venturing into these businesses in big way, thanks to the thrust on retail, dairy, horticulture, etc.

IAS 41 requirement
International Accounting Standard 41 (IAS 41) prescribes the accounting treatment for agriculture, which includes biological transformation of living animals or plants for sale into agricultural produce or additional biological assets. IAS 41 requires measurement at fair value less estimated point-of-sale costs from initial recognition of biological assets up to the point of harvest, except in rare cases.
IAS 41 requires that a change in fair value less estimated point-of-sale costs of a biological asset be included in profit or loss for the period in which it arises. Under a historical cost accounting model, a plantation forestry enterprise might report no income until first harvest and sale, perhaps 30 years after planting.
On the other hand, the International Accounting Standard Board (IASB) believes an accounting model that recognises and measures biological growth using current fair values reports changes in fair value throughout the period between planting and harvest.
Where market-determined prices or values are not available for a biological asset in its present condition, IAS 41 requires use of the present value of expected net cash flows from the asset discounted at a current market-determined pre-tax rate in determining fair value.

Fair value challenge
When IAS 41 was issued it met with severe criticism because many agricultural assets are simply not subject to reliable estimates of fair value. For instance, a colt which is kept as a potential breeding stock, grows into a fine stallion. The stallion starts winning race events. The stallion earns substantial amount for its owner from breeding services. The stallion gets older, his utility decreases. Eventually the stallion dies of old age and the carcass used as pet food.
At each stage in the life of the horse, the fair values would change significantly, but estimating the fair values can be extremely subjective and difficult. In many ways, the stallion reminds one of fixed assets. Changes in fair value of fixed assets are not recognised in the income statement, then why should the treatment be different in the case of agricultural non-financial assets?
Vineyards, coffee and tea plantations have similar measurement issues. The relationship between the vines and coffee or tea plants and the land that they occupy is unique and integrated. The vine or plant itself has relatively little value. However, in conjunction with the land, they do have value.
Determining the fair value for a vineyard, coffee or tea plantation involves estimating the production along with sales prices and costs for a number of years in the future, together with estimating a terminal value and the application of a discount rate to calculate the net present value — an enormously complex and subjective task.
The value of the vines and plants would then have to be determined as a residual because it would be calculated by deducting the value of the unimproved land and the value of the infrastructure from the aggregate value. It is clear that the valuation, as a result of the estimates and subjectivity, is open to substantial variability.
Because biological assets are subject to droughts, floods and diseases the unrealised gains arising from changes in fair value, can give a distorted picture of the financial results of the agricultural enterprise. It could be misunderstood and may lead to inappropriate decision making, such as dividend declaration from unrealised profits.

Homogeneity of assets
Another question about the reliability of measurements relates to the homogeneity of the assets. During the transformation process, it could be very difficult to determine the likely quality.
Even if the quality is known, estimating the price and the market where the produce would be ultimately sold could become a challenge.
Although the recognition of unrealised gains and losses on financial assets is achieving wider acceptance, the IASB has not yet put forward any convincing arguments in favour of a fair value model for non-financial assets.
IAS 38, on intangible assets, allows such assets to be carried at re-valued amounts. However, for intangible assets to be carried at re-valued amounts IAS 38 imposes a strict criteria — an active market is necessary, which requires items traded to be homogeneous, with willing buyers and sellers normally being found at any time and prices being available to the public.
However, IAS 41 does not impose the same hurdles for agricultural assets and requires them to be fair valued except in rare cases. The IAS 41 approach, therefore, is inconsistent with other international standards.
Given the criticisms on fair valuation and the fact that commercial farming enterprises in India operate as private companies and surely don’t need the additional cost burden that may not produce reliably results, the ICAI should develop a standard based on the historical cost model.

New interpretations on construction contracts

Recently, the International Accounting Standards Board (IASB) issued two IFRIC (International Financial Reporting Interpretations Committee) interpretations that seek to clarify accounting treatments for two critical areas of accounting — construction contracts and net investment in a foreign operation with effect from January 1, 2009.
IFRIC 15
IFRIC 15 standardises accounting practice across jurisdictions for the recognition of revenue by real-estate developers for sales of units, such as apartments or houses, ‘off plan’ — that is, before construction is complete.
The fundamental issue is whether the developer is selling a product (goods) — the completed apartment or house — or a service — a construction service as a contractor engaged by the buyer.
The revenue from selling products is normally recognised at delivery. And the revenue from selling services is normally recognised on a percentage-of-completion basis as construction progresses.
IFRIC 15 provides guidance on how to determine whether an agreement for the construction of real estate is within the scope of IAS 11 ‘Construction Contracts’ or IAS 18 ‘Revenue’ and, accordingly, when revenue from the construction should be recognised:
An agreement for the construction of real estate is a construction contract within the scope of IAS 11 only when the buyer is able to specify the major structural elements of the design of the real estate before construction begins and/or specify major structural changes once construction is in progress (whether it exercises that ability or not).
If the buyer has that ability, IAS 11 applies.
If the buyer does not have that ability, IAS 18 applies.
If IAS 11 applies, the revenue is recognised on a percentage-of-completion basis provided that reliable estimates of construction progress and future costs can be made.
Even if IAS 18 applies, the agreement may be to provide construction services rather than goods.
This would likely be the case, for instance, if the entity is not required to acquire and supply construction materials.
If the entity is required to provide services together with construction materials in order to perform its contractual obligation to deliver real estate to the buyer, the agreement for the sale of goods falls under IAS 18.
IFRIC 16
IFRIC 16 clarifies that the presentation currency does not create an exposure to which an entity may apply hedge accounting.
Consequently, a parent entity may designate as a hedged risk only the foreign exchange differences arising from a difference between its own functional currency and that of its foreign operation.
IFRIC 16 concludes that the hedging instrument(s) may be held by any entity or entities within the group.
IFRIC 16 concludes that while IAS 39 must be applied to determine the amount that needs to be reclassified to profit or loss from the foreign currency translation reserve in respect of the hedging instrument, IAS 21 must be applied in respect of the hedged item.
Construction contracts have always proved tricky to both accountants as well as the taxman.
In a recent judgment in the Magus Construction Pvt. Ltd vs Union of India (2008-TIOL-321-HC-GUW-ST) case, the Guwahati High Court held that the activity of construction of flats by a builder for their subsequent sale was not chargeable to service tax under construction of complex services.
Although the POC (percentage of completion) method is popular and acceptable to the realtor, auditor as well as the taxman, the agreement entered into by the parties to a transaction assumes importance and could alter accounting and tax treatments.

Tea factories apply for energy audit

In the first instance, 15 bought-leaf tea factories in Nilgiris have applied for energy audit under the energy conservation project launched by Tea Board in co-operation with United Nations Development Programme’s Global Environment Facility and implemented by Technology Informatics Design Endeavour (TIDE).
“Detailed energy audit is our first step towards conserving thermal and electrical energy in factories. Our project engages accredited energy auditors and regularly monitors the progress of the audit. The project will bear up to 75 per cent of the audit cost as per a slab-spread,” said Mr R.D. Nazeem, Tea Board’s Executive Director.

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Circular soon for exchanges to audit accounts

India Infoline News Service / Mumbai Jul 11, 2008 15:26
Securities and Exchange Board of India (SEBI) has decided to make it mandatory for stock exchanges and depositories to annually audit their transactions as per new code of conduct evolved by the market regulator.

Securities and Exchange Board of India (SEBI) has decided to make it mandatory for stock exchanges and depositories to annually audit their transactions as per new code of conduct evolved by the market regulator, disclosed its Whole Time Member, Dr. T C Nair.

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IFRIC issues Interpretation on construction of real estate

July 2008:
The International Financial Reporting Interpretations Committee has issued an Interpretation, IFRIC 15 Agreements for the Construction of Real Estate. IFRIC 15 standardises accounting practice across jurisdictions for the recognition of revenue by real estate developers for sales of units, such as apartments or houses, 'off plan' – that is, before construction is complete.
Observations about IFRIC 15:
Fundamental issue. The fundamental issue is whether the developer is selling goods – the completed apartment or house – or is selling a service – a construction service as a contractor engaged by the buyer. Revenue from selling goods is normally recognised at delivery. Revenue from selling services is normally recognised on a percentage-of-completion basis as construction progresses. IFRIC 15 provides guidance on how to determine whether an agreement for the construction of real estate is within the scope of IAS 11 Construction Contracts or IAS 18 Revenue and, accordingly, when revenue from the construction should be recognised.
IAS 11 or IAS 18? An agreement for the construction of real estate is a construction contract within the scope of IAS 11 only when the buyer is able to specify the major structural elements of the design of the real estate before construction begins and/or specify major structural changes once construction is in progress (whether it exercises that ability or not). If the buyer has that ability, IAS 11 applies. If the buyer does not have that ability, IAS 18 applies.
If IAS 18, service or goods? Even if IAS 18 applies, the agreement may be to provide construction services rather than goods. This would likely be the case, for instance, if the entity is not required to acquire and supply construction materials. If the entity is required to provide services together with construction materials in order to perform its contractual obligation to deliver real estate to the buyer, the agreement for the sale of goods under IAS 18.
Implications of IFRIC 15. The main expected change in practice is a shift for some entities from recognising revenue as construction progresses to recognising revenue at a single time – at completion upon or after delivery. Agreements that will be affected will be mainly those currently accounted for in accordance with IAS 11 that do not meet the definition of a construction contract as interpreted by the IFRIC and do not transfer to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses.

IFRIC 15 is effective for annual periods beginning on or after 1 January 2009 and must be applied retrospectively.mail to me at casatbirgill@gmail.com for bare act of IFRIC 15

IFRIC guidance on hedge of an investment in a foreign operation

July 2008: The International Financial Reporting Interpretations Committee has issued an Interpretation, IFRIC 16 Hedges of a Net Investment in a Foreign Operation. Currently, practice has diverged as a result of differing views on which risks are eligible for hedge accounting under IAS 39.
IFRIC 16 clarifies three main issues:
Whether risk arises from (a) the foreign currency exposure to the functional currencies of the foreign operation and the parent entity, or from (b) the foreign currency exposure to the functional currency of the foreign operation and the presentation currency of the parent entity's consolidated financial statements.
IFRIC 16 concludes that the presentation currency does not create an exposure to which an entity may apply hedge accounting. Consequently, a parent entity may designate as a hedged risk only the foreign exchange differences arising from a difference between its own functional currency and that of its foreign operation.
Which entity within a group can hold a hedging instrument in a hedge of a net investment in a foreign operation and in particular whether the parent entity holding the net investment in a foreign operation must also hold the hedging instrument.
IFRIC 16 concludes that the hedging instrument(s) may be held by any entity or entities within the group.
How an entity should determine the amounts to be reclassified from equity to profit or loss for both the hedging instrument and the hedged item when the entity disposes of the investment.
IFRIC 16 concludes that while IAS 39 must be applied to determine the amount that needs to be reclassified to profit or loss from the foreign currency translation reserve in respect of the hedging instrument, IAS 21 must be applied in respect of the hedged item.
IFRIC 16 is effective for annual periods beginning on or after 1 October 2008 and may be applied prospectively.
Mail to me at casatbirgill@gmail.com for bare act of IFRIC 16

AS-30 ? A premature birth

AS-30 ? A premature birth

In an environment where usage of complex and hybrid financial instruments is increasingly becoming common; where innocuous sale, purchase and rental transactions might conceal hidden derivatives; where sophisticated instruments have been made available to Indian Corporates; India could not afford to exist without Accounting Standards which prescribe measurement, accounting, presentation and disclosure norms for these instruments.

Accountability of independent directors

Accountability of independent directors
The ongoing global financial crisis has had its effect on a wide variety of persons and events. With losses mounting to more than $400 billion, financial companies have given pink slips to more than 83,000 employees while top bosses at global financial brands such as Citi, Merrill Lynch and UBS have also packed their corner offices and left.
While there can be no doubt that these top bosses own responsibility for the misadventures of the entities they run, a debate is raging abroad about the role that independent directors play in this scenario and whether the top boss is solely responsible.
The debate also criticises the Sarbanes Oxley Act (SOX) of neutralising directors’ efficiency by increasing the burden of financial and regulatory compliance and neglecting the bread-and-butter role of monitoring company strategy.
Surveys of the composition of the boards of eight prominent financial institutions revealed that two-thirds of these boards had no significant experience in banking business and less than half had financial industry service. Stithapragna
Independent directors are defined by their name — independent. They are supposed to function like Stithapragna — the concept mooted in the Mahabharata — whose job role can be defined to be one who is sleeping when others are awake and awake when others are sleeping. He is duty-bound to raise the red flag when he spots an inherent issue which the others could not do merely because they possess a non-independent status.
While this is a tall order, if one visualises a situation in which out of a board of eight, seven agree for vetting a not-so-foolproof risk management policy and all eyes point to the independent director for his nod, chances of his raising a storm are limited as he would opt for a go-with-the-masses policy.
The International Accounting Standards Board (IASB) and other bodies such as the Income-Tax Appellate Tribunal (ITAT) have a solution for this by encouraging the dissenter to document his dissent. While a hare-brained proposal could be dissented, it is the day-to-day decisions taken by the board with no clue as to the implications in the future which could defy normality.
A recent notification from the Institute of Chartered Accountants of India (ICAI) urging companies to mark-to-market derivative losses led to litigation between banks that sold exotic derivatives and the entities that bought them with eyes blindfolded.
Examples in Wall Street have shown that a vast majority of the directors could not fathom the intricacies of a derivative transaction. Indian Situation
The revised Clause 49 of the Listing Agreement in India mandates that if the chairman of the board is a non-executive director, at least one-third of the company’s board should comprise independent directors. If the chairman is an executive director, at least one-half (or 50 per cent) should be independent directors.
The eligibility criteria are laid down in the revised Clause 49 of the Listing Agreement. While the crème-de-la-crème of independent directors have enough directorships of eminent companies, it is the mid-rung and lower mid-rung companies that seek truly independent directors.
All events — whether a crisis or a scam — occur the biggest in the US as its exposure to the complicated world of finance is extreme.
However, financial institutions and banks in India are feeling a minor tremor from the global situation which could act as a warning signal for the future.
A robust and transparent risk-management policy — validated at frequent intervals, being transparent with significant issues amongst all stakeholders in the company and constant communication — seems to be absolutely critical now.

Auditing firms face EU heat

Auditing firms face EU heat
Auditing firms in the country could soon run out of business if they do not get themselves verified according to the guidelines mentioned in the Eighth Directive issued by the European Union (EU). EU will recognise balance-sheets of companies audited by firms that fit their specified standards.

Mergers & Acquisitions become Simpler

Mergers & Acquisitions become Simpler
The move gives corporates the flexibility to go ahead with mergers without facing legal hurdles, if they do not fall under the commission’s criteria.

Important Sections of Companies Act 1956

Some Important Sections Related with Audit
224. Appointment and remuneration of auditor.
224A Auditor not to be appointed except with the approval of the company by special resolution in certain cases.
225 Provisions as to resolutions for appointing or removing auditors
226. Qualifications and disqualifications of auditors
227. Powers and duties of auditors
228. Audit of accounts of branch office of company
229. Signature of audit report, etc.
230. Reading and inspection of auditor’s report
231. Right of auditor to attend general meeting
232. Penalty for non-compliance with sections 225 to 231
233. Penalty for non-compliance by auditor with sections 227 and 229
233A. Power of Central Government to direct special audit in certain cases
233B. Audit of cost accounts in certain cases

SECTION 226: - Qualification and Disqualification of Auditor
226 (1)
· Chartered Accountant with in the meaning of the Chartered Accountants Act, 1949
· a firm whereof all the partners practicing in India are qualified for appointment, as aforesaid, may be appointed by its firm name to be the auditors of a company in which case any partner so practicing may act in the name of the firm
226 (2)
· Not being in force
226 (3)
Disqualification of auditor
· a body corporate;
· an officer or an employee of the company;
· a person who is a partner, or who is in the employment of an officer or employee of the company;
· a person who is indebted to the company for more than Rs. 1,000 or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for more than Rs. 1000; and
· a person holding any security of that company.
226 (4)
· disqualified from acting as auditor of that company’s subsidiary or holding company or of any other subsidiary of the same holding company
226 (5)
· When the auditor appointed but later on he fails the requirement of sub section 3-4 then he will be automatically vacated.
SEC. 314 – A C.A is not disqualified if his relative or his employee works as a director, secretary or any other person. But the permission of CG is must
Sec. 224: - Appointment of Auditor
224 A
Cases when the auditor appointed by SPECIAL RESOLUTION
· A company in which 25% of the SUBSCRIBED CAPITAL
o A public financial institution (NABARD, ICICI, AVIC, HUDKO) or a government or the CG or any SG, or
o A financial or any other institution established by provincial or State Act in which a SG, holds not less than 51% SUBSCRIBED CAPITAL
o A nationalized bank or an GENERAL INSURANCE COMPANY
o Any combination of these.
· IN case of pass ordinary resolution than the appointment of auditor done by CG u/s 224 (3)
· 25% capital is considered as the Closing date of the register of members
224 (1)
Appointment by Shareholders
224 (1A)
Intimation of auditor to join the job or not in the form 23B
224 (1B)
Ceiling limit of the auditors
· Total 30 co. audits but not more than 20 public co. in which 10 co. does not have the share capital more than Rs. 25 Lakh.
224 (2)
No notice of the intended resolution to appoint some other person or persons in place of the retiring auditor was received by the company that could not be proceeded with due to death, incapacity or disqualification of the other person or persons.
224 (3)
Appointment by C.G
· In that case if auditor not appointed in A.G.M
· In that case when the co. passes the ordinary resolution whether he pass the special resolution u/s 224 A.
· Penalty is 5,000 rs. In case of default.
224 (5)
Appointment of First auditor
It can be appointed by the Board of directors within one month of the date of registration.
If fails to appoint it can be appointed in GENERAL MEETING*
first auditor doesn’t need to intimate.
224 (6)
Appointment in case of casual vacancy*
Other than resignation all the cause the appointment done by the BOARD OF DIRECTORS
In case of resignation the auditor appointed in GENERAL MEETING*.
SECTION. 619: - Auditor