2010September Icai Journal

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

VOLUME 59 NO. 3 SEPTEMBER 2010 R100

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THE CHARTERED

ACCOUNTANT

Editorial

september 2010 tHe CHArtereD ACCOUNtANt 3

Limited Liability Partnership (LLP)Limited Liability partnership Act,

2008 has been enacted to provide for the establishment of the LLps, an alternative corporate business vehicle that gives the benefits of limited liability and allows its members the flexibility of organizing their internal structure on the basis of a mutually arrived agreement. this format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular. Individuals or existing businesses can be members of a Limited Liability partnership, and an LLp must have at least two members. As prescribed, every LLp should also have two designated partners of whom one shall be the resident in India. Day-to-day operations of LLp are managed by the designated partners who are also responsible for ensuring the compliance of all the applicable laws. Limited Liability partnership is managed as per the LLp Agreement. Unlike in the case of a company, there is no requirement for minimum capital contribution for an LLp. However, the registration cost for LLp is determined on the basis of amount of contribution.

While an LLp will be a separate legal entity liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLp. Further, no partner would be liable on account of the independent or unauthorised actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct. thus one advantage of this structure, in preference to a limited company, is that the partners will have flexibility in the matter of

internal working and, at the same time, their liability will be limited.

An LLp shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. since, tax matters of all entities in India are addressed by the Income-tax Act, 1961, the taxation of LLps is also addressed in that Act. LLp is also required to prepare and file the statement of accounts and solvency every year with the registrar of Companies. the accounts of LLp are required to be compulsory audited by a Chartered Accountant, if the turnover of such LLp exceeds R40 lakh or contribution of partners exceeds R25 lakh.

the Finance Act, 2010 has given fillip to emergence of LLp by allowing conversion of private companies or unlisted public companies. However, there are some conditions be satisfied such as continuity of the association by the erstwhile partners/shareholders of the predecessor retaining their interest in the LLp for a period of five years. by prescribing the conversion benefit only to entities having turnover of R60 lakh or less in three preceding years, the scope for eligible entities for conversion is somewhat restricted and regulated. there is complete relief on conversion into LLp and distribution of accumulated profits by the erstwhile entity after minimum lock in period of three years prescribed in law. With this mix of benefits with attendant regulations, if nursed properly by the taxpayers, there is an ample scope for taking total advantage of the available fiscal incentives.

With a view to enable the members of the ICAI to practice through this new business vehicle, consequential

amendments in the Chartered Accountants Act, 1949 arising from the LLp Act, 2008, the Chartered Accountants (Amendment) bill, 2010 was introduced in the rajya sabha in April 2010, which, inter alia, proposes to amend the Chartered Accountants Act, 1949 to (i) apply certain provisions of the LLp Act, 2008 to Chartered Accountants Act 1949 in order to allow the members to form the LLp (ii) to insert new definition of firm, partner, partnership and sole proprietorship (iii) to allow members to form partnership with members of such other professional institutes as prescribed (iv) to empower the Council of the ICAI to make regulations for recognition of other professionals with whom the members of ICAI can enter into partnership in LLp. the bill was referred to the standing Committee on Finance to present its report.

these changes, once enacted, will enable the Chartered Accountants to reap true benefits from this new corporate structure. the LLp structure would also enable them to form big firms (currently only 284 CA firms in India having 10 or more partners), jointly with other legal and technical professionals, providing multi-disciplinary services and competing with their counterparts on global scale.

this hybrid structure will also facilitate entrepreneurs, service providers and professionals to organize and operate in an innovative and efficient manner for effectively competing in the global market. the LLp Act, 2008 will definitely bring a remarkable difference in the existing law related to the company laws in India.

Editorial BoardICAI – Partner in Nation Building

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THE CHARTERED ACCOUNTANT sEpTEmbER 20104

EDITORIAL BOARDEDITOR CA. AMARJIT CHOPRA, PresidentJOINT EDITOR CA. G. RAMASWAMY, Vice-PresidentMEMBERS CA. JAYANT P. GOKHALE CA. JAYDEEP N. SHAH CA. SANJEEV MAHESHWARI CA. SHIWAJI B. ZAWARE CA. M. DEVARAJA REDDY CA. P. RAJENDRA KUMAR CA. SUMANTRA GUHA CA. SUBODH AGARWAL CA. ANUJ GOYAL CA. PANKAJ TYAGEE CA. LAXMINIWAS SHARMA CA. SUBHASH C. GOEL CA. DHARAM V. CHOPRA CA. VIMAL R. KHANNASECRETARY SHRI VIJAY KAPURICAI EDITORIAL TEAM NADEEM AHMED SUSANTA K. SAHU CA. NITIN JAIN Dr. N. K. RANJAN

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA ICAI Bhawan, Post Box No.7100, Indraprastha Marg, New Delhi-110002, Tel: +91 (11) 39893989. E-mail: [email protected], Website: www.icai.org

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Editor — CA. Amarjit ChopraPublished at ICAI Bhawan, P. O. Box No. 7100, Indraprastha Marg, New Delhi - 110 002 and printed at Spenta Multimedia. Peninsula Spenta, Mathuradas Mill Compound. N. M. Joshi Marg, Lower Parel, Mumbai - 400013The views and opinions expressed or implied in THE CHARTERED ACCOUNTANT are those of the authors and do not necessarily reflect those of ICAI. Unsolicited articles and transparencies are sent in at the owner’s risk and the publisher accepts no liability for loss or damage. Material in this publication may not be reproduced, whether in part or in whole, without the consent of ICAI.DISCLAIMER: The ICAI is not in any way responsible for the result of any action taken on the basis of the advertisement published in the Journal. The members, however, may bear in mind the provision of the Code of Ethics while responding to the advertisements.TOTAL CIRCULATION: 1,99,690Total No. of Pages: 164 including Covers

EDITORIAL ............................................................................................ 379FROM THE PRESIDENT .................................................................... 382READERS WRITE ................................................................................ 388PHOTOGRAPHS .................................................................................. 390KNOW YOUR ETHICS ....................................................................... 394LEGAL UPDATE

Legal Decisions................................................................................................. 395 Circulars/Notifications....................................................................................... 412

EAC OPINION ...................................................................................... 418ACCOUNTANT’S BROWSER .......................................................... 486NATIONAL UPDATE ............................................................................ 488INTERNATIONAL UPDATE ............................................................... 490ECONOMIC UPDATE .......................................................................... 492CABF DONORS LIST.......................................................................... 494CLASSIFIEDS ...................................................................................... 494ICAI NEWS

payment of Annual membership/Certificate of practice Fee for the Year 2010-11................................................................................. 495 Campus placement programme for Newly Qualified Chartered Accountants August-september, 2010.................................................................................. 495 Annual Filing of statutory Returns for the Year 2010........................................ 495 Common proficiency Test (paper-pencil mode) - December 2010..................... 496 ICAI Job portal (http://jobs4cas.icai.org).......................................................... 498 For Kind Attention of All members of the s. Vaidyanath Aiyar memorial Fund.. 498 For Kind Attention of All members of the Chartered Accountants benevolent Fund................................................... 499 New publications - Accounting Reforms In India: A Bird’s Eye View............................................. 499 - Technical Guide on Internal Audit of Sugar Industry....................................... 500 ICAI Awards for Excellence in Financial Reporting — Invitation to participate in the Competition for the Year 2009-10...................... 500 peer Review of the Audit Firms of the Listed Companies – Updation of the peer Review status................................................................. 501 Invitation to be a part of the Institute’s Vision-2021........................................... 502

EXPOSURE DRAFT standard on Assurance Engagements (sAE) 3402 Assurance Reports on Controls at a Service Organisation....................................... 507

EVENTS One Day programme on practice and procedures before the CEsTAT at New Delhi, mumbai, Chennai, Kolkata, Ahmedabad and bangalore................. 523 World Congress of Accountants 2010 – Invitation for participation.................. 524 ICAI International study Tour to Australia, 7th-14th November 2010.................... 524 seminar on Capital market at Kolkata.............................................................. 525 Hyderabad Residential service Tax – Intensive................................................. 526

INDEX Index of Volume 58 [July 2009 to June 2010] of The Chartered Accountant.... 527

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

SET UP BY AN ACT OF PARLIAMENT

volume 59 no. 3 september 2010 r100

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THE CHARTERED

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Contents

sEpTEmbER 2010 THE CHARTERED ACCOUNTANT 5

MANAGEMENT Leadership Approach and Attributes in

strategy Implementation in Indian Companies

- Dr. s. K. sharma, Dr. sunil Giri, and

Dr. A. K. sharma 463

........................ TAXATION Treatment of price Difference between the Date of

Removal and Revised price

- CA. m. Govindarajan 452

Overview of Goods and service Tax Legislation

- CA. Rajat mohan 459

BOOK REVIEW Qualifications in the Auditor’s Report and

Disclosures on Accounting standards 487

GENERAL spirituality for a Chartered Accountant

- CA. sanjay manohar Kshirsagar 503

BANKING AND FINANCE Reverse mortgage Facilities in India —

For Cash poor–Home Rich senior Citizens

- CA. Ashok K. malhotra 468

How to manage Our money:

An Introduction to personal Financial planning

- CA. sangameshwar C. shirol 476

BACKPAGECross Word 051smile please 527

........................ AUDITING An Overview of Attestation services in India

- CA. K. L. Chandak 430

Internal Audit manual

- CA. surender pal bagaria 434

ACCOUNTING Introduction to IFRs

- CA. Aditya singhal 421

International Financial Reporting standards:

The Future of Indian GAAp

- CA. shalini Tibe 424

........................

........................ INTERNATIONAL TAXATION Construction pE – basic Concepts and Issues

- Committee on International Taxation of the ICAI 445

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sentiments through our conscience. It is time that we have to plunge deep into our conscience, find out the roots of such differences and remove their traces from it eventually.

people at the receiving end appear to be silent. We are silent too. Is it a careful silence on our part? Let us explore our responses. Let us be aware of the kind of future we will pass on to our generation next. since the youth have an incessant energy, a heritage of divide and intolerance can create havoc in their life, which ultimately will affect the state of affairs in our country. We have to be responsible and vocal about voicing our opinions against it. We owe this to our generation next. We cannot evade our responsibility to our times. This is our social responsibility, probably a more important one, as it is more fundamental and capable of affecting our professional spheres too. Can we pledge to move towards this fundamental unity of mankind in our land?

Consolidating Professional Ties Japan: Joint Initiative on IFRSThe undersigned along with the ICAI Vice-president CA. G. Ramaswamy and the Asb Chairman CA. manoj Fadnis recently visited Japan as part of

a high-profile delegation led by shri R. bandhyopadhyay, secretary, ministry of Corporate Affairs, Government of India, with an objective to share our perspective with the concerned Japanese constituent to provide a framework for experience sharing in the process of convergence to the IFRs. With India already committed to treading a path to IFRs convergence in a phased manner and Japan having started the thought process for mandatory application of IFRs to be determined around 2012, the coming together of these Asian economies assumes a great significance in the region. The visit witnessed the signing of a historic moU between the Core Group on IFRs (constituted by the ministry of Corporate Affairs, Government of India) and the IFRs Council, Japan. The undersigned signed the moU representing India in the presence of the representation from ministry of Corporate Affairs, Government of India, and other officials. During the occasion, the five sub-groups on accountancy profession represented by undersigned and CA. G. Ramaswamy, Accounting standards represented by CA. manoj Fadnis, stock exchanges represented by smt. Usha Narayanan, Executive Director, sEbI, regulatory issues represented by shri sunil Verma, secretary, Audit

Dear All:Let us recall when, about a year ago, the parents of Indian students studying in Australia were fear-stricken, as violence allegedly on the line of racial discrimination had been reported. mass and media of our country had raised their voice against this violence. According to the UN, a ‘discrimination between human beings on the ground of race, colour or ethnic origin is an offence to human dignity and shall be condemned…as a violation of the human rights and fundamental freedoms…as a fact capable of disturbing peace and security among peoples.’ Our own Constitution in its Article 15(2) defines: ‘No citizen shall, on grounds only of religion, race, caste, sex, place of birth or any of them, be subject to any disability, liability, (or) restriction…’

post-independence, for quite some years, the same ghost (of discrimination) has been haunting us in our own land. soul of India lives in villages, it is said. Visit villages and we may discover: there is no concept of common wells, utensils or places of worship, to be used by all. We are generally more aware of the difference on grounds of religion/caste and our socialisation with people of different religion/caste decreases. When it comes to family, such people are not a reality for us. Their inclusion in family is farther away from reality. This divide continues at workplace too. We are neither ready to acknowledge the presence of this divide nor strong enough to resist its presence. It is not acceptable that we still have divided opinions over such instances. martin Luther King Jr., had expressed his concerns over this social difference and the value of togetherness: ‘We cannot walk alone…I have a dream that one day on the red hills of Georgia the sons of former slaves and the sons of former slaveowners will be able to sit down together at a table of brotherhood….I have a dream that my four children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character.’ Unity is divine. India as a multicultural country presents us lots of challenges in the way of our unity, but history shows, we have always resisted such divisive

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board, C&AG, shri Jitesh Khosla, IICA, and representatives of pFRDA, IRDA and RbI, and industry represented by CA. T. V. mohandas pai, Infosys, met and exchanged their views. Apart from the undersigned and Asb Chairman, sEbI Chairman mr. C. b. bhave, smt. Narayanan and mr. Ravi mohan from RbI also made presentations. Then, India-Japan Forum 2010 on issues related to implementation of IFRs was held. sir David Tweedie, Chairman IAsb, who was also present, addressed the occasion and expressed satisfaction over this dialogue and assured his support to this initiative. The event has a strong attendance of over 300 JICpA professionals and other professionals from Japanese industry.

Singapore: Towards Future TiesAt the advice of the ministry of Commerce, Government of India, the ICAI delegation which included the undersigned and ICAI secretary shri T. Karthikeyana among others, visited singapore to participate in the first round of the 2nd Review meeting in the context of India-singapore CECA. The meeting was attended by the officials of ministry of Trade & Industry, Government of singapore. The undersigned interacted with Dr. Ernest Kan, president, ICpAs, and with other ICpAs functionaries. We clarified them that we at the moment were not looking at the licensing rights and, therefore, would not provide the same to the ICpAs members. Further, it was decided that the two Institutes would share their wish list by mid-August. Wish List from ICpAs has already been received and it is being perused for further necessary actions. While we invited the ICpAs delegation for a visit, they in turn invited us to visit them this year to carry the matter forward. This intent was shared by both ICAI and ICpAs in the plenary session of the Review meeting chaired together by mr. Rahul Khullar, secretary, ministry of Commerce, Government of India and mr. Ravi menon, permanent secretary, minister of Trade, singapore. It has been proposed to hold an international conference jointly with the professional accounting bodies of Australia, New Zealand and singapore in the last week of september in New Delhi.

Bangladesh: Attending SAFA Events An ICAI delegation led by the undersigned that also included the ICAI secretary shri T. Karthikeyan and the Central Council members CA. Raj Kumar Adukia, CA. sumantra Guha and CA. pankaj Tyagee visited bangladesh recently to attend the sAFA events. We actively participated and played a key role in taking the decision to a logical conclusion at the meetings of the sAFA board and Assembly, and of various sAFA Committees. We also attended an international conference organised by the ICAb on Role of Chartered Accoun-tants in the Mobilization of Natural Resources, which was inaugurated by Hon’ble president of the people’s Republic of bangladesh mr. md. Zillur Rahman. It was attended by Nobel Laureate prof. muhammad Yunus, managing Director, Grameen bank, as special guest. Dr. Atiur Rahman, Governor of bangladesh bank, the central bank of the country, was also present in the conference. The Conference provided a platform for sharing knowledge among the participants and for formulating recommendations on effective mobi-lisation of domestic resources.

Status of Convergence with IFRSClearing Accounting Standards As the members are aware, meeting the target of convergence with the IFRs has been one of the primary focus areas of our Institute. To meet this target, relentless efforts are being made. As far as formulation of IFRs-converged Accounting standards is concerned, all standards have been cleared by the Council of the ICAI except that on Insurance Contracts (corresponding to IFRs 4) in respect of which comments are awaited from the IRDA. most of the standards have also been cleared by the National Advisory Committee on Accounting standards (NACAs). Expectedly, all standards would be ready for notification by the Government soon. The exercise to converge with IFRs and not to adopt the same signifies that efforts are being made to formulate Accounting standards which, as far as possible, should be in line with the corresponding IAs/IFRs keeping in view the Indian conditions and circumstances. Accordingly, few

departures are also being contemplated. To be properly addressed at international level, Indian concerns are also being taken up with the IAsb. We would like to thank Accounting standards board Chairman and secretary CA. manoj Fadnis and Dr. Avinash Chander, respectively, for their guidance and strategic contribution in the complete process behind this valuable conclusion.

IASB Outreach Programmessince, in future, we would formulate and revise the converged Accounting standards in accordance with the IFRss issued/revised from time to time, a formal procedure for sending comments on the consultative documents issued by the IAsb has been finalised so that Indian concerns are appropriately raised. To familiarise our members, corporates and other stakeholders with consultative documents and to address their concerns, many IAsb outreach programmes are being organised by the Institute. Recently, such programmes were organised in bangalore, mumbai and Delhi, where IAsb member CA. prabhakar Kalavacherla and IAsb Technical manager ms. April pitman addressed on two IAsb consultative documents on proposed IFRss on Revenue and Leases and interacted with them to know the Indian concerns involved in those documents. One of such programmes held in mumbai was attended by the NACAs Chairman CA. Y. H. malegam also, who expressed reservations against accounting treat-ments suggested by IFRs in respect of Revenue Recognition and Leases.

XBRL Progress: Towards International StatusWe want to inform our members that ICAI had taken an initiative to promote XbRL (eXtensible business Reporting Language) in the country. XbRL is a novel method of electronic communication of business/financial data and an immense utility to capital markets and investing community. It is revolutionising the world business reporting while changing only the way of reporting. ICAI was granted a provisional Jurisdiction of XbRL International Inc. (XII) in December 2008. During its tenure, XbRL India Jurisdiction has developed two taxonomies, General Purpose Financial Reporting XBRL

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Taxonomy for Commercial and Industrial Companies and Banking Taxonomy, which have been acknowledged by the XII. At present, the process of establishing taxonomies for NbFCs has been initiated. These taxonomies act as ‘dictionaries’ which are computer readable financial terms. The Jurisdiction is now in the process of opening up membership, for which a section 25 company is being incorporated. After the incorporation, the Jurisdiction would apply to XII for becoming an Established Jurisdiction, which would enable India for voting at International steering Committee (IsC) of the XII.

ICAI Recommends Amendments to CA Act, 1949Our Council, at its 294th meeting held in march 2010 had constituted a Group on Amendments in the Chartered Accountants Act, 1949, under the Convenorship of the Vice-president of the Institute, CA. G. Ramaswamy, and asked it to suggest draft amendments in the Act arising out of the Report of the High-powered Committee as submitted to the Central Government so as to amend the Act to take disciplinary action against erring CA firms also. On the recommedations submitted in June 2010 by the Group, the Council requested back the Group to reconsider in the light of suggestions made by its members. The Group resubmitted its revised recommendations to the Council in August 2010 and now it will again consider the amendments in light of the suggestions made by the Council members. Then, this will be forwarded to the Central Government for consi-deration and incorporation. The major purpose of making various amendments to the Act is to make disciplinary process speedier and more time-bound, and to demonstrate to society for upholding the highest conduct of the professionals. some of the amendments include the determination of prima-facie cases not to be handled by Director (Discipline) alone but rather by a Committee, action against CA firms, etc. moreover, the action against the firm shall be covered by both schedules to the Act involving not only financial penalty but also suspension thereof. However, the action against the firm is proposed to be taken by the Council only.

Capacity Building Measure: Meeting CA Firms To adhere with the spirit of professional development, the Committee for Capacity building of CA Firms and small & medium practitioners organized in mumbai and New Delhi meetings and brainstorming sessions for the partners of CA firm, where we interacted with the partners of CA firms and got wonderful suggestions.

As a matter of fact, 74 per cent of the profession is comprised of proprietors and, even after 61 years of the profession, most of the members still wait for a bank audit assignment as their major work sphere. It is high time that we come up and create world-class CA firms. We can’t ignore the likely challenge from China. We must be able to foresee the changing scenario in our profession and prepare accordingly. We need to encourage our firms to grow bigger with their multidimensional professional expertise. Networking and merger of the firms should be for real capacity building and, in no way, be limited to audit empanelment. We are aware that some of the arrangements or procedures laid down in the networking rules need to be reconsidered and reviewed afresh so as to encourage networking and merger. Name, place and seniority of the professionals and their firms should not be major concern in consolidations and mergers. perspective and mindset towards consolidation needs to be changed. Firms should join hands for long-term prospects and the right parameter to measure the consolidation and merger of firms would gain in terms of increase in competencies and annual turnover. Here, we would like to appreciate the concerns of our members in profession who wish to set up their practice and face lot of challenges in the process. We are happy to inform that we have entered into an agreement with the Corporation bank, which will grant loan on liberal terms. The details of the scheme will be announced shortly.

Planning Vision Document It is quite satisfying to inform that we have already concluded 19 interactive workshop across the country in order to include the voice and vision of key resourceful people from varied

stakeholder sections of the profession in our vision document, and we still plan to host a few more of such exercises in remaining key areas. members across the strata have expressed their concerns that the Institute should become a major global player by reorienting its strategy in education system including examination reforms so as to produce socially-relevant chartered accountants. However, there were concerns expressed by some stakeholders with regard to realignment of the profession deliverables. We ensure all our stakeholders who have contributed to the process that their valued inputs given towards creating an inspiring vision for the profession will be given due consideration. To ensure members’ active participation, we have hosted a web-form on the agenda of the vision exercise on our website (available till September 15, 2010). We urge our members to become a part of this grand exercise and ensure that their feedback is recorded with us.

Rajya Sabha Deputy Chairman Releases Booklet on Accounting Reforms shri K Rahman Khan, Hon’ble Deputy Chairman, Rajya sabha recently released the booklet, Accounting Reforms in India-A Bird’s Eye View, prepared by the Committee on public Finance & Government Accounting of the Institute. This booklet covers the achievements of accounting reforms, roadblock in the way for accounting reforms, needs to harmonize accounting standards, conversion from cash to accrual system and single to double entry book-keeping, implementation of accrual accounting in Government, and other related issues. While stressing a need to converge from single- to double-entry accounting system, shri Khan appreciated our efforts in bringing out this booklet on Accounting Reforms in India. Having regard to the huge social and developmental expenditure of the Govt. of India on NREGA (now called Mahatma Gandhi Rojgar Yojna), he called upon the profession to conduct in-depth audit to serve the public interest more effectively.

Dr Parthasarathy Shome at ICAI Council Meeting Dr. parthasarathy shome, Chief

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Economist in the Her majesty’s Revenue and Customs (the british tax office) and ex-Advisor to the former Finance minister of the country, came to the Institute at the 297th meeting of the Council held on 5th August, 2010. It was a matter of pride and privilege to have the august presence of one of the top economists at the Council meeting of the Institute and we must thank our Council Colleague ms. bhavna J. Doshi for taking the initiative for organising his visit. Dr. som recalled that, as an advisor to the Finance minister mr. p. Chidambaram, he always suggested him to get chartered accountants from the national institute to look through what they were through. He admitted that he revered the accountancy profession.

Foundation Stone at Jodhpur: Seminar on Accounting and TaxationThe undersigned visited the newly acquired land site and laid the foun-dation stone of the Jodhpur branch of ICAI. The senior-most member of the Jodhpur branch and first gold-medallist of the Institute, CA. Ajeet singh s. bhandari was also honoured.

A seminar on Accounting and Taxation was organised for the members that was followed by a successfully-held, i.e. strong attendance of over 350, students’ seminar at Jodhpur. The undersigned was the Chief Guest for the programme. CA. sunil Goyal, past president, ICAI, CA Kemisha soni, Chairperson-CIRC, and CA. Rajendra Kumar saraf, Chairman-Jodhpur branch were also present on the occasion. We apprised the members about the proposed plan of the Institute for increasing the membership fees, biometric verification in the CpE seminars, increase in contribution to the benevolent funds, etc. We asked our members to look at the infrastructure from a long-term perspective. With regard to our students’ initiative, we conveyed that various new measures like uploading of the training record by articled assistant, updation of study materials of IpCC course, commencement of the virtual classrooms by November 2010, etc., are in the pipeline. We also stressed our concerns for the students’ motivation for studying on continuing basis with seriousness.

Conference on Audit and Financial Reporting in Udaipur Two-day conference on Excellence in Audit and Financial Reporting was organised by the Udaipur branch of CIRC. Out of many presentations of papers and overviews, some of the notable ones were by our Central Council colleagues CA. Jaydeep N. shah, Chairman, Financial Reporting Review board, and CA. Abhijit bandyopadhyay, Chairman, AAsb, which were appreciated a lot for their deep insight and value-contribution. CA. shah presented Common Discrepancies in Financial Statements Including Audit Reports in the conference, where he apprised the participants about the common non-compliances observed by the Financial Reporting Review board (FRRb) during the review of general-purpose financial statements. CA. bandyopadhyay presented Overview of Standards in Auditing and Best Practices in Audit Reporting.

Training for Members for ICAEW MembershipIn 2008, the ICAI had signed a historic moU with the Institute of Chartered Accountants England and Wales (ICAEW), which allows our members having two-year post-qualification experience to obtain the ICAEW membership on passing the ICAEW’s final advanced-level paper Advanced Case Study – a 4-hour final paper that aims to test candidates’ professional skills in the context of business issues, building on technical skills and learning outcomes. We are happy to inform our members that we are now offering training for that course in our country exclusively through accredited training providers and publishers, Get Through Guides (GTG). GTG and ICAI have jointly designed a 10-day training programme, to be facilitated by faculty from England, for the purpose.

Convocations: Consolidating Members’ Belongingness We would like to inform that a convocation ceremony of our Institute is intended to bring the young members of the profession under the umbrella of chartered accountant fraternity and to consolidate their belongingness to the Institute. The conferment at a convocation

ceremony goes a long way in the milestones of the chartered accountants concerned as they cherish this occasion forever in their life. Convocations for the northern region were successfully held in New Delhi and Ludhiana, where more than 120 members attended the function along with their family members. Convocation for the eastern region was held in Kolkata and more than 200 members attended the function along with their family members. Convocations for the southern region were held in bangalore and Chennai where more than 120 members and 250 members, respectively, attended the function along with their family members. suresh C. senapaty, Exec. Director & CFO, Wipro, and Col. (Dr.) G. Thiruvasagam, Vice-Chancellor, University of madras, were the chief guest in the bangalore and the Chennai ceremonies respectively.

Disciplinary Cases Concludedsince the Council has expressed its serious concerns over the speedy conclusion of the disciplinary cases going on in the Institute, the Disciplinary Committee has followed the Council’s disposition in the right spirit and has cleared many cases since February 2010: Disciplinary Committee – 60 cases under section 21D and 20 cases under section 21b; board of Discipline – 34 cases under section 21A; and old Disciplinary 10 cases.

Students’ MattersRevision of StipendWe are really happy to inform our students that the Council at its recent meeting, keeping in view the prevailing inflation rate, felt a need for revising the existing stipend of articled assistants and decided to double it from its existing value. Accordingly, in order to implement the same, the relevant draft amendments in the Chartered Accountants Regulations, 1988 would be sent to the Central Government for approval, as the same would come into force after its approval:

PEE-II, PCE and IPCE ResultsThe ICAI recently announced the results of the examinations of pE II, pCE and IpCE held in may, 2010 on August 4, 2010. The pass percentages (both Groups) were 1.95, 13.5 and 12.28

385

From the President


Director shri Vijay Kapur – for playing a strategic role in the preparation and execution of the above-said decisions.

This is also to inform that we are planning to propose a mega international conference in the third week of January 2011 in New Delhi. Exact dates will be announced later. We appeal to our professional fraternity to join in large number and make this a successful event.

Let us recall what the Corporate Affairs minister shri salman Khurshid had said on July 1 this year: Bring a change in your policy and bring at least 33 per cent women power before a lady joins in my position. Although uttered in humour, we cannot ignore its underlying serious implications on our profession and society. The truth cannot be kept aside. First educator of our family has to be an educated and empowered person. It is quite desirable that women running their homes and managing their accounts for ages must get a respectable share in the profession. Gender equality is a serious concern – both before profession and society. A better show of the female candidates in the examinations of pE II, pCE and IpCE held in 2010 is a sign of good hope in this direction. We appreciate this leap towards equality and sincerely wish the community success in its true and justified endeavours. Change in tradition, if constructive and positive, is never a distortion, and we should always welcome such a change.

Weather, a symbol of change, is a justified metaphor for life too. Weather may be good or bad and nothing much could be done about this. Nowadays, it is raining day and night cats and dogs in the capital. American poet and columnist J. m. L. Hughes says: Let the rain beat upon your head with silver liquid drops. Let the rain sing you a lullaby. We would like to wish everybody a happy rainy season with sound health.

best Wishes

CA. AMARJIT CHOPRApresident, ICAIAugust 27, 2010

in pE II, pCE and IpCE examinations respectively.

Female Candidates Excel: There are two candidates at all-India first rank in the professional Competence Examinations (pCE) held in may 2010 with 77.67 per cent marks and both of them are female students. Even the second-rank holder is a female student with 76.33 per cent marks. The two of the first three toppers, second and third, of the IpCE (Integrated professional Competence Examination) held in may 2010 are again female students. The second topper with 76.00 per cent marks is very close to the first, i.e. 76.14 per cent. The pass percentage of female student in all examinations but in pE-II, is better than their male counterparts.

Region-wise Performance: The percentage of students passed in pCE as well as in IpCE of the EIRC region was the best one among all regions, i.e. with 20.05 and 16.73 per cent respectively, while the WIRC was trailing behind on the second position with 13.71 per cent in the pCE and, surprisingly, the overseas was the second best in IpCE with 13. 64 per cent. CIRC was a close third, i.e. 13.29 per cent, in the pCE and WIRC got third rank with 12.84 per cent in the IpCE.

Decisions for PE-II and PCC StudentsWe are happy to inform our student community that the Council has considered the case of pE-II students especially in order to mitigate their hardship vis-à-vis their joining the CA course through pCC/IpCC route. pE-II students having joined the course through all streams can now commence articled training in case they have passed any of the groups of pE-II examination instead of earlier requirement of passing both the groups. They will also be eligible to appear in the Final Examination during the last 12 months of articled training. In addition, such students shall be exempted from undergoing the Orientation programme, on switching over to IpC course. Further, they shall not be charged any fee for switching over to IpC course, except R1,500 to cover the cost of study material and administrative charges, instead of R4,000 at present.

With a view to bring overall uniformity, students registered for professional Competency Course (pCC) shall now be eligible to appear in the Final

Examination during the last six months of the three and a half year period of articled training as against the earlier requirement of appearing in the Final Examination after completion of articled training. Further realising the difficulties faced by the students to complete the Information Technology Training (ITT) and Orientation programme before appearing at the examination, it has been decided that all students would now be permitted to submit proof of their successful completion of ITT to the Examination section before the commencement of the article training, instead of earlier requirement of submitting the said proof before appearing in the examination. However, this would not be applicable to the pCC students. However, it has been observed that many students are withdrawing their registration from ITT centres and they wish to complete the ITT and Orientation programme before the commencement of the article training. In our opinion, all such students are advised to undergo ITT and Orientation programme as early as possible, because this wouldn’t only help them in solving the questions posed in examinations in the IT paper but also release the pressure on the training centres.

We have also decided that students with a permanent disability of 50 per cent or more and fulfilling the prescribed guidelines shall be exempted from the payment of fees for undergoing Orientation programme and they shall neither be required to attend the course nor to pass the special test of three hours.

We organised a joint meeting of the Examination Committee and faculty of the board of studies, wherein certain student-friendly decisions were taken. It was decided to host the suggested answers to the questions set in examinations within 25–30 days of the respective examinations. Further, it was decided that the study material should be made more application-oriented and case studies be included in various subjects like Accounting and strategic manegement. steps are also being taken to present a more responsive and transparent examination system in students’ interests.

We would like to thank the Council – particularly ICAI secretary shri T. Karthikeayn, board of studies Chairman CA. Vinod Jain and board of studies

386

READERS WRITE


e-sahaayataa acted very quickly. The reply was so quick that we got the reply within 4 Hours. The practice of sending informative smss over mobile phones is also very useful.

- A. Satyasrinivasa Rao, P. Narasimha Rao, G. N. B. Kiran and P. Rambabu

I am highly pleased with the quick response and prompt action in resolving the grievance through E-sahaayataa mode. I was very happy and satisfied with the end result of my query. It has been much better than expected. I am sure such good work would go a long way in clearing grievances and issues of our fraternity within short notice, in keeping with the high credentials of our profession.

- CA. Sathyaranjan Udupa H.

Formation of a New Group CommendableThe formation of a Group to check fraudulent practices is a welcome step in the right direction. Even nationalised banks are unaware of the genuineness of the signatories to the financial statements, submitted by their clientele, for sanction of fresh/additional limits. They should be enabled to verify the genuineness from any corner of the country on website. similarly, the use of nomenclature ‘Auditors’ should not be allowed to be used by non-CAs, since it misleads the public, especially when they are not authorised to conduct audit of any kind and issue Audit Reports.

- CA. Suresh. R. Puducherry

More Articles on GST, DTC and IFRS These days, GsT, DTC and IFRs are the current and most relevant topics of members’ interest at large. Whole system of Direct as well Indirect Taxes is going to change within a year or so. Timely and up-to-date information on these topics is very much required by professionals like us to keep ourselves abreast about the recent developments and changes nationwide. Therefore, it is desirable that Institute provides vital information on the recent developments on these topics by regularly containing a page or two in each coming Journal till these become Act or are implemented. Also, more seminars and workshops on these topics need to be conducted during the current year.

- CA. Hardeep Saini, Hoshiarpur

August 2010 Issue of Journal was Knowledge EnhancingCongratulations! Journal for the month of August 2010 was yet another knowledge enhancing Issue. The articles, especially “Research and Development Expenditure Accounting,” were highly informative and interesting. Examples of difference between Research and Development were interesting to read. Another article which deserves special mention was “IFRs: Are Indian banks Ready!” The benefits of convergence with IFRss among the different sections of the society raise the confidence to adapt to these changes in the near future. major five technical accounting challenges for banks and what should bank focus on to meet this challenge while converging with IFRss were really interesting to read.

- CA. Savita Khanna

The August (2010) issue of the journal effectively packed knowledge and information to the benefit of large section of members. Coverage on ICAI Flag, Accounting Legend Rai bahadur pandit balak Ram pandya, ‘CA Day Celebrations’ and the article titled ‘setting up a Website for a CA Firm’ were specially informative and interesting. The articles published under ‘Accounting’, ‘Taxation’ and ‘International Taxation’ sections were also very useful from members perspective. Congratulations for combining quality content and attractive presentation in this issue.

- CA. P. Deslahra

“e-sahaayataa” is Really SuperbAs a student of ICAI, it makes me feel proud that the Institute has launched a new helpline for us called “e-sahaayataa”. In general I was of the view that a query regarding registration letter (of IpCC in my case) would take nearly 10-15 days. but I tried to do it using this helpline and to my high satisfaction I got my e-registration letter as fast as in 4 hours of posting the complaint. I would like all concerned to make use of this platform for easy and quick outcome. Thank you ICAI.

- Swapnil Jain, CA Student

We are very much satisfied with the quick and appropriate response from Team e-sahaayataa. The date of expected reply given for us is evening of August 4, 2010. but the Team

Editor

EditorFor the Attention of ReadersReaders’ attention is specifically invited to the fact that the views and opinions expressed or implied in The Chartered Accountant journal are those of the respective authors only, and not of the ICAI. The ICAI bears no responsibility of any sort whatsoever in case of any action taken by any reader based on any article published in the Journal.

Write to Editor‘Information is power’ and our ever-evolving profession needs more and more of that today than ever before. Do you have any relevant points to make, experiences to share, and views to spread among the CA fraternity? If yes, e-mail us at [email protected]/[email protected] or write to: The Editor, The Journal section, ICAI, A-94/4, sector 58, Noida (Up) - 201301

388

Photographs


ICAI President CA. Amarjit Chopra addresses partners of various CA firms, while Central Council members CA. Sanjeev Maheswari (Chairman, CCBCAF & SMP), CA. Jaydeep N. Shah, CA. Sanjay K. Agarwal and CA. Pankaj Tyagee share the dais (August 17, 2010)

Capacity Building and CA Firms

ICAI President CA. Amarjit Chopra addresses the partners of CA firms, while Central Council members CA. Sanjeev Maheswari (Chairman, CCBCAF & SMP) and CA. Nilesh Vikamsey share the dais. (August 11, 2010)

Shri Rahman Khan releases the Booklet, while ICAI President CA. Amarjit Chopra, ICAI Secretary Shri T. Karthikeyan and Central Council members CA. Anuj Goyal, CA. V. Murali, CA. Madhukar N. Hiregange and CA. Pankaj Tyagee follow the spirit of moment (July 30,2010)

ICAI President CA. Amarjit Chopra and ICAI Vice-President CA. G. Ramaswamy celebrate Dr. Shome’s presence (August 5, 2010)

Rajya Sabha Deputy Chairman Releases a Booklet on Accounting Reforms in India

Dr. Parthasarathy Shome, Chief Economist, Her Majesty’s Revenue and Accounts at 297th Council

New Delhi Mumbai

Mr Noriaki Shimazaki, Chairman, International Affairs Committee, the IFRS Council of Japan and CA. Amarjit Chopra, President, ICAI, in the august presence of Mr. R. Bandyopadhyay, Secretary, MCA, Government of India, exchange their MoUs, while Mr. R. Ramanujam, Minister (Economic & Commercial), Embassy of India in Japan and Mr Sunil Verma, Secretary Audit Board, Office of C&AG were also present (July 26, 2010)

Exchanging Vows of Cooperation

390

ICAI President CA. Amarjit Chopra meets Nobel Laureate Prof. Muhammad Yunus, Founder/MD, Grameen Bank (Bangladesh), in Dhaka, while Central Council members CA. Rajkumar S. Adukia and CA. Sumantra Guha look on

Meeting of Minds: SAFA Events

Photographs


Convocation Ceremony at Ludhiana: ICAI President CA. Amarjit Chopra lights the lamp to open the ceremony in presence of members of the Ludhiana Branch of ICAI (August 14, 2010)

Convocation Ceremony

ICAI President CA. Amarjit Chopra lights the lamp with his Central Council colleagues CA. Subodh K. Agrawal and CA. Sumantra Guha, while the Chief Guest, Mayor of Kolkata Municipal Corporation, Shri Sovan Chatterjee shares the dais with them (August 12, 2010)

ICAI President and Vice-President CA. Amarjit Chopra and CA. G. Ramaswamy along with the Central Council members CA. Jaydeep N. Shah, CA. Abhijit Bandyopadhyay and CA. Ravindra Holani at the Conference jointly organised by AASB and FRRB (July 24, 2010)

ICAI President CA. Amarjit Chopra along with ASB Chairman CA. Manoj Fadnis and ASB Secretary Dr. Avinash Chander discussing the concerns with the IASB member CA. Prabhakar Kalavacherla and IASB Technical Manager Ms. April Pitman (August 10, 2010)

ICAI President CA. Amarjit Chopra unveils the stone showing the particulars of the ceremony in the presence of members from the Branch (August 16, 2010)

Foundation Stone of Jodhpur Branch National Conference on Excellence in Audit and Financial Reporting

IASB Outreach Programme at ICAI New Delhi

Ludhiana Kolkata

ICAI President and Vice-President CA. Amarjit Chopra and CA. G Ramaswamy, and Chief Guest Vice-Chancellor, University of Madras, Col. (Dr.) G. Thiruvasagam lighting the lamp together on the occasion, while Central Council member CA. V. Murali fondly looks on (August 23, 2010)

ChennaiWipro Executive Director and CFO CA. Suresh C. Senapaty lights the lamp to open the ceremony, while ICAI Persident CA. Amarjit Chopra, Central Council members CA. M. Devaraja Reddy and CA. K. Raghu, and other members of the Branch put their hands together for the moment (August 22, 2010)

Bangalore

392

ICAI President CA. Amarjit Chopra hoisting the National Flag and sharing the joy with the kids, i.e.future of our country, while NIRC Chairman CA. Atul K. Gupta, NIRC member CA. Hans R. Chugh and others cherish the moments of delight (August 15, 2010)

Together We Stand and Smile

ICAI NEWS


IMPORTANT ANNOUNCEMENT Committee for Capacity Building of CA Firms and Small & Medium Practitioners

Audit Tool Kit & Document Management Software

the Committee for Capacity building of CA Firms and small & medium practitioners, ICAI has compiled ready-to-use illustrative checklists for various areas of professional needs such as Accounting standards, Audit manual, CArO, bank branch Audit, tax Audit and illustrative formats for day to day Income tax correspondence etc. the same is launched on July 1, 2010, in a tool kit containing softwares namely KDOC and esecretary. the application of the software will help the members in efficient audit documentation and Knowledge & Contact management. the CDs containing software are being sent in a tool kit free of cost to all the members and CA Firms. the details of use and benefits are given on ICAI website http://www.icai.org/ccbcaf/kdoc-esecretary.html. members may avail the benefits of this initiative.

Database for Transfer Pricingthe Committee in order to enable members to have

access to qualitative database for doing comparative study for transfer pricing, has tied up with C-mOts Internet technologies pvt. Ltd. for providing access to Capitaline tp Corporate Database (online version) at a special discounted price of R10,000/- plus taxes only. the database is complemented with powerful analytical software tools to enable extensive query and search. members desirous of availing the benefit of this arrangement may visit http://www.icai.org/ccbcaf/capitaline/register.html.

NOte: General information on audit tool kit software and transfer pricing database are available on ICAI’s website www.icai.org under Committee page. members may also contact the Committee for details of products by email on [email protected].

393

Ethics


Know Your Ethics*

shall follow the direction given, by the Council or an appropriate Committee or on behalf of any of them, to him being the incoming auditor(s) not to accept the appointment as auditor(s), in the case of unjustified removal of the earlier auditor(s).

Q. Can the auditor revise his Audit Report?A. Yes, the Council has issued a “Guidance Note on Revision of the

Audit Report” in booklet form. The auditor can revise his audit report in the situations and circumstances mentioned therein.

Q. Whether a member of the Institute shall be deemed to be guilty of professional misconduct, if he includes in any statement, return or form to be submitted to the Council or any of its committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority any particulars knowing to be false?

A. Yes, as per Clause (3) of part II of the second schedule to the CA Act, 1949, a member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct if he includes in any statement, return or form to be submitted to the above authorities any particulars knowing them to be false.

Q. What is the status of a Chartered Accountant who is a salaried employee of a Chartered Accountant in practice or a firm of such Chartered Accountants?

A. An associate or a fellow of the Institute who is a salaried employee of a Chartered Accountant in practice or a firm of such Chartered Accountants shall, notwithstanding such employment, be deemed to be in practice for the limited purpose of the training of articled assistants. He may hold Certificate of practice, but he is not entitled to perform attest functions w.e.f. 1.4.2005.

Q. Can a member in practice be Promoter/Promoter Director of a Company?

A. Yes, there is no bar to a member in practice becoming a promoter/signatory to the memorandum and Articles of Association of any company. For becoming such promoter/signatory, members are not required to obtain specific permission of the Council .

Q. Can such a Promoter/Promoter Director of a Company may be Director Simplicitor of that Company?

A. Yes, there is also no bar for a such a promoter/signatory becoming Director simplicitor of that Company irrespective of whether the objects of the Company include areas which fall within the scope of the profession of Chartered Accountants. In this case also, specific permission of the Council is not required.

Q. Can a member in practice be a sleeping partner in family business concern?

A. Yes, a member in practice can be a sleeping partner in a family business concern provided he takes specific permission from the Council in terms of Regulation 190A of CA Regulations.

Q. Can a member who is in part time/full time employment apply for Certificate of Practice and perform audit?

A. No, he cannot perform audit although he can apply for Certificate of practice.

Q. What should be the size of signboard for the office?A. With regard to the size of the signboard for his office that a

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

*Contributed by the Ethical Standards Board of ICAI

Ethical Issues in Question-Answer FormQ. Is there any recommended scale of fees chargeable for the

work done by the members of the Institute?A. The Council of the Institute recommends from time to time scale

of fees chargeable for the work done by the members of the Institute. such scale of fees were last revised in may, 2006. They are appearing at pages 326-327 of the Code of Ethics, 2009 and also being given hereunder for the benefit of members:

Existing Revised with effect from (12th May 2006)

Between(R)

And(R)

Between(R)

And(R)

1. For giving expert evidence in courts of law in the Union of India according to professional standing of the witness.

5,000 10,000 7,500 15,000

[For each day or part there of, spent in atten-dance and/ or travelling]

[For each day or part thereof, spent in attendance and/ or travelling]

2. Other work:

(a) statutory Audit,Tax Audit, Internal Audit, Accountancy and secretarial Work:

principal 600 1,200 900 1,800

Qualified Assistants 300 600 450 900

semi-Qualified/Other Assistants

100 [per Hour]

200 [per

Hour]

150 [per

Hour]

300 [per Hour]

(b) Taxation Work:

principal 1,000 2,000 1,500 3,000

Qualified Assistants 500 1,000 750 1,500


200[per

Hour]

400 [per

Hour]

300 [per

Hour]

600 [per Hour]

(c) Investigation, management services or special Assignments:

principal 1,500 3,000 2,250 4,500

Qualified Assistants 750 1,500 1,125 2,250


250[per

Hour]

500[per

Hour]

375[per

Hour]

750[per Hour]

394

Note1. Office time spent in travelling would be chargeable. In case

of outstation work, travelling and out-of-pocket expenses would also be chargeable.

2. The Council issues for general information the above revised recommended scale of fees which it considers reasonable under present conditions. It will be appreciated that the actual fees charged in individual cases will be a matter of agreement between the member and the client.

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

A. Yes, in exercise of the powers conferred by Clause (1) of part II of the second schedule to the CA Act, the Council of the Institute of Chartered Accountants of India issued General Guidelines, 2008 which specify that a member of the Institute in practice

LEGAL UPDATE


Legal Decisions

DIRECT TAXESSection 10(23C) of the Income-tax Act, 1961 – Religious Trust/ InstitutionWhere trust carried on no activity other than educational activities, fact that a surplus had incidentally arise from activities of trust after meeting expenditure incurred for conducting educational activities, would not disentitle trust of benefit of exemption

Vanita Vishram Trust v. Chief Commissioner of Income-tax, May 6, 2010 (BOM)The Chief Commissioner declined to grant approval to the petitioner trust.

The bombay High Court held that though the objects clause of the assessee trust contained varied objects even including the management and development of movable and immovable properties, the only activity which had been carried out by the Trust ever since its inception was the conduct of educational institutions. The petitioner was an institution which had not sought approval for the first time or which had been set up in the proximate past. The trust had a history of over eighty years during the course of which the only activity was of conducting educational institutions.The fact that the Trust existed solely for educational purposes was evidenced from assessment orders made under section 143(3). These orders contained statement to the effect that the assessee was running schools and colleges with the sole intent of imparting education. merely because some surplus arises from the operations of a Trust, it cannot be held that the institution is running for the purpose of profit, so long as no person or individual is entitled to any portion of the profit and the profit is utilized for the purpose of promoting the objects of the institution and the income of such a Trust will be exempted under section 10(22). If after meeting the expenditure, a surplus results incidentally from an activity lawfully carried on by the educational institution, the institution would not cease to be one which is existing solely for educational purposes since the object is not to make profit. If a Trust exists solely for educational purposes and conducts an educational institution, the fact that it has other objects, will not disentitle it to the exemption so long as the activity carried out by it in that assessment year is that of running an educational institution and not for profit. Though the memorandum of Association of a trust contains varied objects, so long as the record demonstrates that the assessee only conducts educational institutions, it must be regarded as existing solely for the purpose of education and no other activity is carried on. secondly, the fact that a surplus may incidentally arise from the activities of the Trust, after meeting the expenditure incurred for conducting educational activities would not disentitle the Trust of the benefit of the provisions of section 10(23C).by the third proviso, it has been clarified that in the case inter alia of Universities or other educational institutions which have applied its income or accumulated it for application wholly and exclusively to the objects for which it

is established and in a case where fifteen per cent of income is accumulated on or after April 1, 2002, the period of the accumulation of the amount exceeding fifteen per cent, shall in no case exceed five years. This provision would establish that parliament did not regard the accumulation of income by a University or educational institution governed by subclause (vi) as a disabling factor, so long as the purpose of accumulation is the application of the income wholly and exclusively to the objects for which the institution has been established. parliament has, however, prescribed that where more than fifteen per cent of the income is accumulated after 142002, the amount exceeding fifteen per cent shall not be accumulated for a period in excess of five years.For all these reasons, the rejection of the approval to the petitioner trust was manifestly misconceived.

Section 10A of the Income-tax Act, 1961 – Free Trade Zonebusiness losses of a noneligible unit, cannot be set off against profits of eligible unit while computing deduction under section 10A [Assessment Years 200304 & 200405]

Scientific Atlanta India Technology (P) Ltd v. Asstt. CIT, February 5, 2010 [ITAT-Chennai(SB)]From the reading of section 10A, it can be easily inferred that what is contemplated is only deduction of profits and gains derived by an undertaking from export of articles or things or computer software The very fact that the section 10A is brought under separate subheading and the specific word “deduction” used in the section would go to show that the intention of the Legislature was to give only deduction and not exclusion from total income. Of course, in the initial years, the entire profits of such undertaking eligible for deduction under section 10A was allowed as deduction. However, with effect from 142003, the said deduction was restricted to 90 per cent of such profits and gains derived by undertaking by adding separate proviso to section 10A. perhaps, the Legislature knowingly or consciously has kept section 10A under a separate subheading within Chapter III only with the idea of varying the percentage of deduction from year to year or whenever necessary. Even though section 10A falls under Chapter III, it has been mentioned in the section itself that what is to be given is only a deduction and not exemption.

Under the scheme of the Act, the profits of the unit eligible for deduction under section 10A, would form part of the income computed under the head “profits and gains of business and profession”. However, in order the same will not suffer tax, deduction will have to be made in respect of such profits while computing the income under the head “profits and gains of business and profession”. In other words, a deduction in respect of profits eligible under section 10A is required to be made at the stage of computing the income under the head “profits and gains of business or profession. Thus, what is contemplated by the Legislature is that profits and gains of the

LegaL Decisions1

1 Readers are invited to send their comments on the selection of cases and their utility at [email protected]. For the convenience of readers full text of these cases have been hosted on the website of the institute at the link: www.icai.org/post.html?post_id=967&c_id=59

395

LEGAL UPDATE


Legal Decisions

undertakings from the export of article or things or computer software are to be deducted while computing the profits and gains of business or profession (at hundred per cent up to assessment year 200203 and ninety per cent thereafter). Even though it is a deduction to be given, it is to be deducted while arriving at the profits of business and profession and not from the gross total income as envisaged under Chapter VlA. Thus, deduction under section 10A under Chapter III of the IT Act is to be granted while computing the profits and gains of business and profession itself and not from the gross total income.

From the reading of section 80Ab, it can be seen that the section says that section 10A is not included in Chapter VlA. Hence, as long as section 10A is not falling under Chapter VlA, section 80Ab cannot be applied.

Even though the claim under section 10A is a deduction and not exemption, the same cannot be subjected to provisions of section 80Ab which falls under different chapter, namely, Chapter VIA so long as the Legislature has not specifically mentioned so to apply the provisions of section 80Ab, to the claim of deduction under section 10A. It can be noticed that even though there is a mention about sections 80HH, 80HHA, 80IA and 80Ib in section 10A(6), no mention about sections 80Ab, 80HHC and 80HHE has been made.

It can be noticed from the language of section 10A(1) that a deduction of such profits and gains that as are derived by “an” undertaking qualifies under section 10A is to be given from the total income. Interestingly, the Legislature has mentioned the profits and gains as are derived by an undertaking. It means that the assessee may have more than one undertaking and in such a case, one has to consider the profits and gains of that “particular undertaking” which qualifies for deduction under section 10A. According to section 10A(4), the deduction is to be computed in the same proportion which bears to the profits of the undertaking, the same proportion as the export turnover bears to the total turnover. It may be noticed that again the words used are “profits and gains of business of the undertaking”. In any case, this is not the total profits of the business of the assessee. Thus, in computing deduction under section 10A, the total income is to be ascertained as per the provisions of the Act in respect of “that undertaking” and the amount so determined is to be reduced from the total income.

Nowhere it is mentioned in the section that such deduction is to be restricted to the total income of the assessee computed under the provisions of the Act, before allowing such deduction. On the other hand, wherever the Legislature wants to restrict the deduction, it has provided such restriction.

Conclusion:The deduction under section 10A is not an exemption but only a deduction under Chapter III of the Incometax Act and the provisions of section 80Ab of Chapter VIA would not be applicable to such deduction under section 10A, and also that the deduction under section 10A is undertaking specific.

Where there is only one eligible unit claiming deduction under section 10A, the loss from noneligible unit cannot be set off against the profits of the eligible unit while determining deduction under section 10A.

If there are more than one undertaking which is eligible for deduction under section 10A and if some of the units have profit and other units have loss, it would be an entirely different case.

Section 14A read with Sections 10(33) and 94 of the Income-tax Act, 1961 - Total income - Expenditure in-curred in relation to income not includible inIn dividend stripping transaction, though alleged to be colourable device by Department, loss on sale of units at lower NAV after declaration of tax exempted, dividend could not be considered as expenditure in relation to earning of dividend income that is exempted under section 10(33) and, hence, it cannot be held to be disallowable under section 14A [Assessment Year 200001]

CIT v. Walfort Share & Stock Brokers P. Ltd, July 6, 2010 (SC)A mutual fund company advertised that tax free dividend income could be earned if investments were made before record date of 2432006. The assessee invested R8 crores on 2432000 and earned dividend at the rate of Rs. 4 per unit. As a result of the dividend payout, the NAV of the mutual fund, which was R17.23 per unit on the record date, fell to R13.23 on the next trading date 2732000. the assessee sold all units at NAV of R13.23 per unit on 2732000 and received R5.9 crores as against R8 crores. In its return, the assessee claimed the dividend received as exempt under section 10(33) and also claimed setoff for the loss against its taxable income, thereby seeking to reduce its tax liability and gain tax advantage. According to the revenue, the differential amount between the purchase and sale price of the units [i.e. loss of R4 per unit] constituted “expenditure incurred” by the assessee for earning taxfree income, hence, liable to be disallowed under section 14A.

The supreme Court of India held that the words “expenditure incurred” in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to 37). Every payout is not entitled to allowances for deduction. These allowances are admissible to qualified deductions. These deductions are for debits in the real sense. A payback does not constitute an “expenditure incurred” in terms of section 14A. Even applying the principles of accountancy, a payback in the strict sense does not constitute an “expenditure” as it does not impact the profit & Loss Account. payback or return of investment will impact the balancesheet whereas return on investment will impact the profit & Loss Account. Cost of acquisition of an asset impacts the balance sheet. Return of investment brings down the cost. It will not increase the expenditure. Hence, expenditure, return on investment, return of investment and cost of acquisition are distinct concepts. Therefore, one needs to read the words “expenditure incurred” in section 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows

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certain expenditures incurred to earn exempt income from being deducted from other income which is includible in the “total income” for the purpose of chargeability to tax.

The scheme of sections 30 to 37 is that profits and gains must be computed subject to certain allowances for deductions/expenditure. The charge is not on gross receipts, it is on profits and gains. profits have to be computed after deducting losses and expenses incurred for business. A deduction for expenditure or loss which is not within the prohibition must be allowed if it is on the facts of the case a proper Debit Item to be charged against the Incomings of the business in ascertaining the true profits. A return of investment or a payback is not such a Debit Item, hence, it is not “expenditure incurred” in terms of section 14A. Expenditure is a payout. It relates to disbursement. A payback is not an expenditure in the scheme of section 14A. For attracting section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. payback or return of investment is not such proximate cause, hence, section 14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, section 14A cannot be invoked. The return of investment cannot be construed to mean “expenditure” and if it is construed to mean “expenditure” in the sense of physical spending still the expenditure was not such as could be claimed as an “allowance” against the profits of the relevant accounting year under sections 30 to 37 of the Act and, therefore, section 14A cannot be invoked. Hence, the two asset theory was not applicable in the instant case as there was no expenditure incurred in terms of section 14A.

Section 28(i) of the Income-tax Act, 1961 - Business and professional income – Chargeable as Receipt relating to liquidated damages on delay in supply of plant and machinery is capital receipt in hands of assessee [Assessment Year 197475]

CIT v. Saurashtra Cement Ltd, July 9, 2010 (SC) The assessee, entered into an agreement with the supplier for purchase of additional cement plant. As per the agreement, in the event of delay caused in delivery of the machinery, the assessee was to be compensated at the rate of 0.5 per cent of the price of the respective portion of the machinery for delay of each month by way of liquidated damages by the supplier, without proof of actual loss. However, the total amount of damages was not to exceed 5 per cent of the total price of the plant and machinery. The supplier defaulted and failed to supply the plant and machinery on the scheduled time and, therefore, the assessee received an amount of R8,50,000 from the supplier by way of liquidated damages.

A question arose whether the said amount received by the assessee as damages was a capital or a revenue receipt.

The supreme Court held that the delay in supply could be of the whole plant or a part thereof but the determination of damages was not based upon the calculation made in respect of loss of profit on account of supply of a particular part of the plant. It was evident that the damages to

the assessee was directly and intimately linked with the procurement of a capital asset, i.e., the cement plant, which would obviously lead to delay in coming into existence of the profit making apparatus, rather than a receipt in the course of profit earning process. Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee as supplier had failed to supply the plant within time as stipulated in the agreement and the relevant clause for liquidated damages came into play. The aforestated amount received by the assessee towards compensation for sterilization of the profit earning source, not in the ordinary course of their business, was a capital receipt in the hands of the assessee.

Section 28(i) of the Income-tax Act, 1961 - Business and professional income – Chargeable as Where assessee company was in business of selling timeshare units in its various resorts, entire amount of timeshare membership fee receivable by assessee up front at time of enrolment of a member would not be income chargeable to tax in initial year when there was contractual obligation fastened to such receipt to provide services in future over term of contract [Assessment Years 199899 to 200203]

Asstt. CIT v. Mahindra Holidays & Resorts (India) Ltd, May 26, 2010 [ITAT-Chennai (SB)]The assessee company was in the business of selling timeshare units in its various resorts. The relevant balance sheet showed an amount of R14,98,30,966 under the heading “Deferred income – advance towards members facilities.” This figure represented the amount collected from timeshare members but not recognised as revenue for the current year.

The question arose as to whether the entire amount of the timeshare membership fee receivable by the assessee upfront at the time of enrolment of a member was the income chargeable to tax in the initial year when there is a contractual obligation fastened to the receipt to provide the services in future over the term of the contract.

The Chennai bench of Tribunal held that two conditions are necessary to say that income has accrued to or earned by the assessee. They are, (i) it is necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise, and (ii) a debt must have come into existence and he must have acquired a right to receive the payment. In the present case, a debt was created in favour of the assessee immediately on execution of the agreement. However, it could not be said that the assessee had fully contributed to its accruing by rendering services. The assessee was bound to provide accommodation to the members for one week every year till the currency of the membership. Till the assessee fulfilled its promise, the parenthood could not be traced to it. The reservation for holiday could be done 90 days to 1 day before the commencement of holiday but the same was subject to availability. In other words, if the resort requested for was not available, the member would be deprived of the holiday. If the assessee confirmed the reservation but was not able to provide the allotted or the alternate accommodation,

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assessee was liable to pay liquidated damages to the member. but it was not liable to pay any damages if it was not able to provide an accommodation on account of non availability. membership fee was essentially a consideration for the right to occupy a resort for one week in a year for 33/25 years. but the contingency of non availability of accommodation would always be there. sometimes, if the assessee was not able to provide accommodation in any of its notified resorts, it would try to procure alternate accommodation. This also would entail additional expenditure on the part of the assessee over and above paying liquidated damages to the assessee. The liability in this case was difficult not only to quantify but also to reasonably estimate it. However, the liability was undoubtedly there. However, no scientific basis has been brought to our notice to quantify the same even reasonably. In the instant case, the membership was ever increasing and in which year how many contingencies of nonavailability of accommodation could arise, could be anybody’s guess.

The word “contingencies” is not used in the sense that the event of nonavailability of accommodation is wholly uncertain. The event is certain, only how many such events can occur is uncertain. The assessee was bound to provide accommodation for one week in a year during the tenure of the membership.

secondly, by saying that no service was left to be rendered, what the assessee means to say was that there was no taxable event under the service Tax laws once a person becomes member.

The past event was admitting a person as a member with a promise to fulfil the obligation of providing him accommodation for one week every year for the next 33/25 years. It was not an ordinary obligation. The sale of timeshare unit is not as tangible as sale of goods but becomes tangible when the assessee fulfils its promise. There was every possibility of an obligating event arising which will result in an outflow of resources.

The assessee could not have made reasonable provision every year which would meet the matching concept also. A provision is recognised when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognised. In the present case, the assessee had a present obligation as a result of a past event. Thus, the first condition was satisfied. The outflow of resources was probable to settle the obligation. The second condition was also satisfied. However, considering the nature of activity, it was the third condition which was difficult to be satisfied. The demand for accommodation by the members is essentially tourism oriented. Tourism, in turn, depends on several factors. They may be social, political, climatic and so on. There may be many possibilities which may not come to mind but may put the assessee into tremendous pressure. All these factors are such which are twined with the normal human life and hence are not only certain to occur but also makes it difficult to reasonably estimate the probable outflow of resources.

There was a definite liability cast on the assessee to fulfil its promise and therefore, it could not be said that the entire fee received by it had accrued as income. As a result, the peculiar nature of the activity and the complexity attached to it, no reasonable provision for the liability could be made. Therefore, recognising the entire receipt as income in the year of receipt could lead to distortion. The revenue expenditure which was incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it incurred. It could not be spread over a number of years even if the assessee had written it off in his books over a period of years. However, the facts may justify an assessee who had incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year.

The liability which was likely to be incurred in future was to be estimated, more so in the absence of any scientific basis or historical data. Therefore, the only way to minimise the distortion was to spread over a part of the income over the ensuing years. It was not justifiable to tax the entire income in a single year as was the case of the department.

Accordingly, it was to be held that the entire amount of timeshare membership fee receivable by the assessee up front at the time of enrolment of a member was not the income chargeable to tax in the initial year.

Section 80HHC of the Income-tax Act, 1961 - Deduc-tions - Profits from export businessWhere foreign exchange fluctuation was not in respect of sale proceeds or its delayed realization and it was in respect of deposits in EEFC Account and interest on deposits in EEFC Account receipts on account of foreign exchange fluctuation cannot be treated as part of business income and accordingly cannot be included in profit of business while calculating deduction under section 80HHC [Assessment Years 200001 to 200405]

CIT v. Shah Originals, April 22, 2010 (BOM) II. Circulars:The question arose as to whether receipts on account of foreign exchange fluctuation on EEFC Account and interest on EEFC Account can be treated as part of business income and accordingly included in the profit of business while calculating deduction under section 80HHC.

The bombay High Court held that the assessee received the entire proceeds of the export transaction.

The Reserve bank of India, had granted a facility to certain categories of exporters to maintain a certain proportion of the export proceeds in an EEFC Account. The proceeds of the account were to be utilised for bonafide payments by the account holder subject to the limits and the conditions prescribed. An assessee who is an exporter is not under an obligation of law to maintain the export proceeds in the EEFC Account but, this is a facility which is made available by the Reserve bank. The transaction of export is complete in all respects upon the repatriation of the proceeds. It lies within the discretion of the exporter as to whether the

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export proceeds should be received in a rupee equivalent in the entirety or whether a portion should be maintained in convertible foreign exchange in the EEFC Account. The exchange fluctuation that arises, it must be emphasized, is after the export transaction is complete and payment has been received by the exporter. Upon the completion of the export transaction, what the seller does with the proceeds, upon repatriation, is a matter of his option. The exchange fluctuation in the EEFC Account arises after the completion of the export activity and does not bear a proximate and direct nexus with the export transaction so as to fall within the expression “derived” by the assessee in subsection (1) of section 80 HHC. The exchange fluctuation arose subsequent to the transaction of export. In other words, the exchange fluctuation was not on account of a delayed realization of export proceeds. The deposit of the receipts in the EEFC Account and the exchange fluctuation which has arisen therefrom cannot be regarded as being part of the profits derived by the assessee from the export of goods or merchandise.

The interest which has arisen as a result of the deposits maintained in the EEFC Account cannot be regarded as representing the business income of the assessee. The business of the assessee consisted of the manufacture and export of garments. The interest income which was generated from the deposits held in the EEFC Account would not fall for classification as income under the head of business and profession but, would fall for classification as income from other sources.

The fluctuation in the instant case was not on account of the sale proceeds or for that matter on account of a delayed realization of the sale proceeds. The fluctuation had arisen in the deposits maintained by the assessee in the EEFC Account in convertible foreign exchange after the completion of the export transaction. Therefore, the receipts cannot be treated as part of business income and accordingly cannot be included in profit of business while calculating deduction under section 80HHC.

Section 94 read with section 14A of the Income-tax Act, 1961 - Tax Avoidance - Securities transactions Dividend stripping transactions making use of provisions of Act in a preplanned manner, are not sham or bogus; it only after insertion of section 94(7) with effect from 142002, loss to extent of dividend income is to be ignored while loss in excess of dividend income is to be allowed [Assessment Year 200001]

CIT v. Walfort Share & Stock Brokers P. Ltd, July 6, 2010 (SC)A mutual fund company advertised that tax free dividend income could be earned if investments were made before record date of 2432006. The assessee invested R8 crores on 2432000 and earned dividend at the rate of R4 per unit. As a result of the dividend payout, the NAV of the mutual fund, which was R17.23 per unit on the record date, fell to R13.23 on the next trading date 2732000. the assessee sold all units at NAV of R13.23 per unit on 2732000 and received R5.9 crores as ag ainst R8 crores. In its return, the

assessee claimed the dividend received as exempt under section 10(33) and also claimed setoff for the loss against its taxable income, thereby seeking to reduce its tax liability and gain tax advantage. According to the revenue, the differential amount between the purchase and sale price of the units [i.e., loss of R4 per unit] constituted “expenditure incurred” by the assessee for earning taxfree income and, hence, liable to be disallowed under section 14A as a whole.

The supreme Court held that for the assessment years prior to insertion of section 94(7) vide Finance Act, 2001 with effect from 142002, the AO had erred in disallowing the loss. In the case of Vijaya bank v. Additional Commissioner of Income Tax [1991] 187 ITR 541, it was held by this Court that where the assessee buys securities at a price determined with reference to their actual value as well as interest accrued thereon till the date of purchase the entire price paid would be in the nature of capital outlay and no part of it can be set off as expenditure against income accruing on those securities.

A citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not to be frowned upon.

Hence, in the cases arising before 1.4.2002, losses pertaining to exempted income cannot be disallowed. However, after 1.4.2002, such losses to the extent of dividend received by the assessee could be ignored by the AO in view of section 94(7). The object of section 94(7) is to curb the short term losses. Applying section 94(7) in a case for the assessment year(s) falling after 1.4.2002, the loss to be ignored would be only to the extent of the dividend received and not the entire loss. In other words, losses over and above the amount of the dividend received would still be allowed from which it follows that the parliament has not treated the dividend stripping transaction as sham or bogus. It has not treated the entire loss as fictitious or only a fiscal loss. After 1.4.2002, losses over and above the dividend received will not be ignored under section 94(7). If the argument of the Department that such dividend stripping is clourable, is to be accepted, it would mean that before 1.4.2002 the entire loss would be disallowed as not genuine but, after 1.4.2002, a part of it would be allowable under section 94(7) which cannot be the object of section 94(7) which is inserted to curb tax avoidance by certain types of transactions in securities. There is one more way of answering this point. sections 14A and 94(7) were simultaneously inserted by the same Finance Act, 2001. As stated above, section 14A was inserted w.e.f. 1.4.1962 whereas section 94(7) was inserted w.e.f. 1.4.2002. The reason is obvious. parliament realized that several public sector undertakings and public sector enterprises had invested huge amounts over last couple of years in the impugned dividend stripping transactions so also declaration of dividends by mutual fund are being vetted and regulated by sEbI for last couple of years. If section 94(7) would have been brought into effect from 1.4.1962, as in the case of section 14A, it would have resulted in reversal of large number of transactions. This could be one reason why the parliament intended to give effect to section 94(7)

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only w.e.f. 1.4.2002. It is important to clarify that this last reasoning has nothing to do with the interpretations given to sections 14A and 94(7). However, it is the duty of the court to examine the circumstances and reasons why section 14A inserted by Finance Act 2001 stood inserted w.e.f. 1.4.1962 while section 94(7) inserted by the same Finance Act as brought into force w.e.f. 1.4.2002.

Reconciliation of Sections 14A and 94Two sections operate in different fields. section 14A deals with disallowance of expenditure incurred in earning taxfree income against the profits of the accounting year under sections 30 to 37 of the Act. On the other hand, section 94(7) refers to disallowance of the loss on the acquisition of an asset which situation is not there in cases falling under section 14A. Under section 94(7) the dividend goes to reduce the loss. It applies to cases where the loss is more than the dividend. section 14A applies to cases where the assessee incurs expenditure to earn tax free income but where there is no acquisition of an asset. In cases falling under section 94(7), there is acquisition of an asset and existence of the loss which arises at a point of time subsequent to the purchase of units and receipt of exempt income. It occurs only when the sale takes place. section 14A comes in when there is claim for deduction of an expenditure whereas section 94(7) comes in when there is claim for allowance for the business loss. One must keep in mind the conceptual difference between loss, expenditure, cost of acquisition, etc. while interpreting the scheme of the Act.

Para 12 of Accounting Standard AS-13 para 12 indicates that interest/ dividends received on investments are generally regarded as return on investment and not return of investment. It is only in certain circumstances where the purchase price includes the right to receive crystallized and accrued dividends/ interest, that have already accrued and become due for payment before the date of purchase of the units, that the same has got to be reduced from the purchase cost of the investment. A mere receipt of dividend subsequent to purchase of units, on the basis of a person holding units at the time of declaration of dividend on the record date, cannot go to offset the cost of acquisition of the units. Therefore, As13 has no application where units are bought at the ruling NAV with a right to receive dividend as and when declared in future and did not carry any vested right to claim dividends which had already accrued prior to the purchase.

Section 112 read with Sections 48 and 70 of the Income-tax Act, 1961 - Capital gains - Tax on long term capital gainsLong term capital gains on sale of shares, other than bonus shares is to be computed after giving benefit of indexation [Assessment Year 200102]

CIT v. Anuj A. Sheth HUF, April 7, 2010 (BOM)The assessee entered into eight sale transactions involving the shares of four companies. Of the sale transactions,

the shares of Infosys comprised entirely of bonus shares where the cost of acquisition was nil. There being no cost of acquisition, the long term capital gains on bonus shares were computed at R6.13 crore. Out of the remaining seven transactions one sale resulted in a long term capital gain of R9.47 lakh with indexation whereas in the remaining transactions the assessee reported a loss of R2.78 crore with indexation. The assessee set off the long term capital loss of R2.68 crore from the long term capital gains of R6.13 crore and paid a tax of 10 per cent on the net long term capital gain of R3.45 crore. The Assessing Officer adopted the sale price realized from the shares sold by the assessee of R7.51 crore and after deducting the cost of acquisition of shares of R3.16 crore, assessed the long term capital gains without indexation at R4.34 crore. The Assessing Officer denied the benefit of indexation to the assessee while giving effect to the proviso to section 112(1).

The bombay High Court held that the assessee was entitled to indexation by virtue of the second proviso to section 48. moreover, in view of the provisions of section 70 the assessee was entitled to set off the loss sustained in respect of one source falling under the same head of income from its income against any other source under the same head. In the present case, as a matter of fact, the question of indexation in relation to the bonus shares would not arise since the cost of acquisition of bonus shares was nil. Where the cost of acquisition is nil, the indexed cost would necessarily be nil. Out of seven transactions while computing the loss sustained in respect of the six transactions and the profit sustained in remaining one the assessee sought indexation. For the purposes of working out the application of the proviso to section 112, there is nothing in the section which would deprive the assessee of the indexation claimed on the sale of shares where there was a resultant loss. What the proviso to section 112 essentially requires is that where the tax payable in respect of income arising from a listed security, being a long term capital asset, exceeds 10 per cent of the capital gains before indexation, then such excess beyond 10 per cent is liable to be ignored. The assessee reported a net capital gain of R3.45 crore which was computed after setting off the loss sustained in the sale of shares in certain transactions relating to the sale of listed securities against capital gains arising inter alia out of the sale of the bonus shares of Infosys Technologies. The proviso to section 112 requires a comparison to be made on the one hand between the tax payable in respect of income arising from the transfer of listed securities, computed at 20 per cent with the tax payable at the rate of 10 per cent on the capital gains before giving effect to indexation. The present case did not deal with a situation where the assessee had acquired at a cost, shares on the sale of which a capital gain had arisen. Were the assessee to acquire those shares on which a capital gain was to arise, at a cost, then it would have been necessary for the purposes of the proviso to section 112(1) to compute the capital gains before giving effect to indexation under the second proviso to section 48. That, however, would not arise in the facts of

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this case inasmuch as the bonus shares of Infosys on which the assessee realized a capital gain of R6.13 crore were acquired at no cost. There is nothing in the provisions of section 112 which would lead to the acceptance of the contention of the Revenue that the assessee would be entitled to a set off of the loss under section 70, but without the benefit of indexation. No such requirement is legislated upon by parliament either under section 70 or in section 112.

The relevant circulars state the Revenue’s understanding that (i) The benefit of a set off would be available while computing the income arising from the transfer of a long term capital asset, which is part of the total income of an assessee; and (ii) The benefit of the cost inflation index or indexation would continue to be available subject to the condition that where the tax on long term capital gains without adjustment for indexation exceeds 10 per cent such excess shall be ignored.

In the circumstances, on the balance, that the Tribunal was justified in coming to the conclusion that the assessee’s claim of computation of long term capital gains on the sale of shares other than the bonus shares of Infosys, after giving the benefit of indexation was in consonance with the proviso to section 112(1) and that the assessee was assessable to net long term capital gain of R3.45 crore.

Section 195 read with Sections 45 and 201 of the In-come-tax Act, 1961 - Deduction of tax at source - Pay-ments to Non-residentWhere foreign fishing vessel charted by assessee started journey from India port to catch fish in sEZ, i.e., outside territory of India, brought fish to Indian port and after customs and port clearance received 85 per cent of fish as charter fee, mere sale of fish and realization of sale consideration of fish by it outside India, (e.g., in sEZ) would not mean that there was no receipt in India; assessee would be liable to TDs

Kanchanganga Sea Foods Ltd. v. CIT, July 7, 2010 (SC)The assessee/appellant was an Indian company engaged in sale and export of sea food and for that purpose obtained permit to fish in the exclusive economic zone of India. To exploit the fishing rights, the appellant entered into an agreement chartering two fishing vessels from a nonresident Hong Kong based company. 85 per cent of the gross earnings from the sale of fish was to be paid to the nonresident company. Trawlers were delivered to the appellant with full equipment and complement of staff at Chennai port. Actual fishing operations were done outside the territorial waters of India but within the exclusive economic zone. The voyage commenced and concluded at Chennai port. The catch made at high seas were brought to Chennai where surveyor of Fishery Department verified the log books and assessed the value of the catch over which local taxes were levied and paid. The assessee after paying the dues arranged Customs clearance for the export of the fish and the

Trawlers, which were used for fishing, carried the fish to destination chosen by nonresident company. The Trawlers reported back to Chennai port after delivering fishes to the destination and commenced another voyage. The appellant did not deduct the tax from the nonresident company. Notice under section 201(1) was issued to the appellant to show cause as to why it should not be deemed to be an assessee in default in relation to tax deductible but not deducted.

The supreme Court held that from a plain reading of provision of section 5 it is evident that total income of nonresident company shall include all income from whatever source derived received or deemed to be received in India. It also includes such income which either accrues, arises or deem to accrue or arise to a nonresident company in India. The legal fiction created has to be understood in the light of terms of contract. In the present case the chartered vessels with the entire catch were brought to the Indian port, the catch were certified for human consumption, valued, and after customs and port clearance nonresident company received 85 per cent of the catch. so long the catch was not apportioned the entire catch was the property of the assessee and not of nonresident company as the latter did not have any control over the catch. It was after the nonresident company was given share of its 85 per cent of the catch it did come within its control. It is trite to say that to constitute income the recipient must have control over it. Thus the nonresident company effectively received the charterfee in India. Therefore, the receipt of 85 per cent of the catch was in India and this being the first receipt in the eye of law and being in India would be chargeable to tax. The nonresident company having received the charter fee in the shape of 85 per cent of fish catch in India, sale of fish and realization of sale consideration of fish by it outside India would not mean that there was no receipt in India. When 85 per cent of the catch was received after valuation by the nonresident company in India, in sum and substance, it amounted to receipt of value of money. Had it not been so, the value of the catch ought to have been the price for which nonresident company sold at the destination chosen by it. According to the terms and conditions of the agreement charter fee was to be paid in terms of money, i.e., Us $ 600,000 per vessel per annum “payable by way of 85 per cent of gross earning from the fishsales”. There was no escape from the conclusion that income earned by the nonresident company was chargeable to tax under section 5(2).

It was, thus, obvious that the assessee was liable to deduct tax under section 195 on the payment made to the nonresident company and admittedly it having not deducted and deposited was rightly held to be in default under section 201.

Section 263 of the Income-tax Act, 1961 - Revision – Of orders prejudicial to revenueWhere original assessment is reopened under section 147 in relation to certain specified grounds and, subsequent to passing of order of reassessment, jurisdiction under

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section 263 is sought to be exercised with reference to issues which do not form subject of opening of assessment or order of reassessment; period of limitation provided for in subsection (2)of section 263 would commence from date of order of original assessment and not from date on which order of reopening for reassessment is passed [Assessment Year 200405]

Ashoka Buildcon Ltd. v. Asstt. CIT, April 23, 2010 (BOM)The original assessment under section 143(3) was passed on 27122006. Reopening of said order was sought by notice under section 148 on 632007 solely on the basis that the benefit of section 72A had been wrongly allowed to the assessee. In the order of reassessment on 27122007, the assessee’s claim regarding section 72A was disallowed. On 3042009 the Commissioner issued a notice under section 263 on the ground that the assessment order passed on 27122007 was erroneous and prejudicial to the interest of the Revenue.

The bombay High Court held that under section 263, the Commissioner did not find any error in the reassessment order dated 27122007 in respect of claim under section 72A. The revision notice dated 3042009 adverted to issues which, did not form either the subject matter of the notice for reassessment nor the reassessment order. The jurisdiction under section 263 was sought to be exercised with reference to issues which were unrelated to the grounds on which the original assessment was reopened and reassessed. These were related to different deductions, losses, etc.

subsection (2) of section 263 stipulates that no order shall be made under subsection (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. That period of two years from the end of the financial year in which the original order of assessment dated 27122006 was passed, had expired on 3132009. Hence the exercise of the revisional jurisdiction in respect of the original order of reassessment was barred by limitation. This was sought to be obviated by the Commissioner of Income Tax by seeking to revise, under section 263, the order dated 27122007. The order dated 27122007 was passed after the assessment was reopened on the ground of an escapement of income under section147 and an order of reassessment was passed by which the claim under section 72A came to be disallowed.

There was nothing on the record of the instant case to indicate that there was any other income which had come to the notice of the Assessing Officer as having escaped assessment in the course of the proceedings under section 147 and when he passed the order of reassessment. The Commissioner, when exercised his jurisdiction under section 263, in the facts of the present case, was under a bar of limitation since limitation would begin to run from the date on which the original order of assessment was passed. The bar of limitation in instant case arose because the revisional jurisdiction under section 263 was sought to be exercised in respect of issues which did not form the subject matter of the reassessment proceedings under section 143(3) read with section 147. In respect of those issues, limitation would commence with reference to the original order of assessment.

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of the AAR, cannot be regarded as being erroneous or as being prejudicial to the interests of the Revenue. since the invocation of the jurisdiction was not proper in the instant case, the petitioners should not be relegated to pursue the proceedings initiated under section 263.

INDIRECT TAXESExcise/CustomsRule 57Q of the Central Excise Rules, 1944 – Modvat CreditWhere admittedly, appellant was not able to identify machinery for which capital goods in form of components, spares and accessories had been used, in absence of such identification, it was not possible for Assessing Authorities to come to a decision as to whether modvat Credit would be given in respect of capital goods in question

Madras Cements Ltd. v. CCE, May 6, 2010 (SC)In order to avail of modvat/Cenvat credit, an Assessee has to satisfy the Assessing Authorities that the capital goods in the form of component, spares and accessories had been utilized during the process of manufacture of the finished product.

Where admittedly, the appellant was not able to identify the machinery for which the goods in question had been used, in the absence of such identification, it was not possible for the Assessing Authorities to come to a decision as to whether modvat Credit would be given in respect of the goods in question.

OTHER ACTSCompanies ActSection 397 of the Companies Act, 1956 - Application to Company Law Board for relief in cases of oppressionWhere minority shareholders themselves were party in awarding turnkey contract to respondentmajority shareholders and also instrumental in paying large sums to respondent, petitioner could not allege oppression/mismanagement and siphoning off of company’s fund

Incable Net (Andhra) Limited v. AP. Aksh Broadband Ltd, May 5, 2010 (SC)The respondent No. 1 company awarded a turnkey EpC contract to the Respondent No.5 which was one of the principal shareholders having a controlling interest in the company. The said contract envisaged the completion of the infrastructural facilities within a period of 65 weeks at a fixed cost of R370 crore upto the stage of commission and implementation of the project. As a point of oppression and mismanagement, the petitioners alleged that the respondent No. 5 company had not fulfilled the contractual obligations while siphoned off funds of the company.

The supreme Court held that admittedly, the Respondent No.5 was a majority shareholder in the Respondent No. 1 Company and at the same time the EpC Contract had also been given by the Respondent No. 1 Company to the Respondent No. 5, to which transaction the petitioner No.

If the exercise of the revisional jurisdiction under section 263 was to be in respect of issues which formed the subject matter of the reassessment, after the original assessment was reopened, the commencement of limitation would be with reference to the order of reassessment. The present case did not fall in that category. Therefore, the exercise of the revisional jurisdiction under section 263 was barred by limitation.

Section 263 of the Income-tax Act, 1961 - Revision – Of orders prejudicial to revenueAssessment order which gives effect to a binding precedent of advance ruling of AAR, cannot be regarded as being erroneous or as being prejudicial to interests of Revenue; unless binding Ruling in case of petitioner is displaced by pursuing requisite procedures under law, that ruling must continue to operate and be binding between petitioner and revenue [Assessment Years 200405 and 200506]

Prudential Assurance Company Ltd. v. Director of Income-tax, April 29, 2010 (BOM)The returned income of the petitioner was accepted in view of the ruling of the AAR in the case of the petitioner. The Director of Income Tax (International Taxation) formed an opinion that the assessment orders were liable to be revised under section 263 on the ground that the AAR, in its subsequent ruling in the case of another FII, viz., Fidelity Northstar Fund, 288 ITR 641 held differently.

The bombay High Court held that evidently, the Commissioner had ignored the clear mandate of the statutory provision that a ruling would apply and be binding only on the Applicant and the Revenue in relation to the transaction for which it was sought. The ruling in Fidelity could not possibly, as a matter of the plain intendment and meaning of section 245s displace the binding character of the advance ruling rendered between the petitioner and the Revenue.

That apart, the Commissioner could not possibly have found fault with the Assessing Officer for having followed a binding ruling. Where the Assessing Officer has followed a binding principle of law laid down in a precedent which has binding force and effect, it is not open to the Commissioner to exercise his revisional jurisdiction under section 263. On two counts the invocation of the jurisdiction under section 263 was improper. Firstly, the Commissioner had ex¬facie made a determination contrary to the plain language of section 245s when he holds that the ruling of the AAR in the case of Fidelity Northstar Fund would apply to the case of the assessee. Unless the binding ruling in the case of the petitioner is displaced by pursuing requisite procedures under the law, that ruling must continue to operate and be binding between the petitioner and the Revenue. secondly, and in any event, the Commissioner could not have possibly come to the conclusion that the view of the Assessing Officer was erroneous or that it was prejudicial to the interests of the Revenue when the Assessing Officer has followed a binding ruling of the AAR. The assessment order which gives effect to a binding precedent, in this case

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2 was also a party in his capacity as ViceChairman of the Respondent No.1 Company. besides being a party to the decision to give the EpC Contract to the Respondent No. 5, the petitioner No. 2 was also instrumental in payment of large sums of money being made to the Respondent No. 5. This would stop him from alleging that the Respondent No.2 Company had been siphoning off the funds of the Respondent No. 1 Company without diligently performing its part of the contract. There is substance in submissions of the respondents that the EpC Contract given to the Respondent No.5 by the Respondent No. 1 was a commercial contract and stood outside the ambit of sections 397 and 398 of the Companies Act. Failure to act in terms of the contract could not be said to have amounted to either oppression or mismanagement by the Respondent No. 1. At best it could be said that the Respondent No. 1 had been used as a tool or mechanism by the Respondent No. 5 to acquire benefits for itself, which in the instant case, did not appear to be so, having regard to the fact that one of the petitioners in the Company petition was himself responsible for such payments being made.

From the facts as revealed, the only conclusion that could be arrived at was that the Respondent No. 5 had committed a breach of contract in regard to supply of materials to the Respondent No. 1 Company in terms of the EpC contract. such lapse would not constitute the ingredients of a complaint under section 397, 398, 402 and 403 of the Companies Act, 1956. such breach could give rise to an action of breach of contract under section 73 of the Indian Contract Act, 1872.

since no act of oppression or mismanagement within the meaning of sections 397, 398, 402 and 403 of the Companies Act, 1956, had been made out by the petitioners against the majority shareholders of the company, there was no justification of making a winding up order on the ground that it would be just and equitable to do so and to pass appropriate orders to bring to an end the matters complained of.

Cr.PCSection 357 of Criminal Procedure Code, 1973 read with Section 138 of Negotiable Instrument Act, 1938 – Order to Pay CompensationA sentence for default can be imposed on default of payment of compensation awarded to victims by Court while passing judgment of conviction

K. A. Abbas H.S.A. v. Sabu Joseph, May 11, 2010 (SC)Essentially section 357 empowers the courts, not to just impose a fine alone or fine along with the sentence of imprisonment, but also when the situation arises, direct the accused to pay compensation to the person who has suffered any loss or injury by reason of the act for which the accused person has been sentenced.

subsection (3) of section 357 empowers the Court to award compensation to victims while passing judgment of conviction. In addition to conviction, the Court may order the accused to pay some amount by way of compensation to victim who has suffered by the action of accused. It may be noted that this power of Courts to award compensation is

not ancillary to other sentences but it is in addition thereto. This power was intended to do something to reassure the victim that he or she is not forgotten in the criminal justice system. It is a measure of responding appropriately to crime as well of reconciling the victim with the offender. It is, to some extent, a constructive approach to crimes. It is indeed a step forward in our criminal justice system. All courts should exercise this power liberally so as to meet the ends of justice in a better way.

A sentence of imprisonment can be granted for default in payment of compensation awarded under section 357(3) of Cr.pC. The whole purpose of the provision is to accommodate the interests of the victims in the criminal justice system. sometimes the situation becomes such that there is no purpose is served by keeping a person behind bars. Instead directing the accused to pay an amount of compensation to the victim or affected party can ensure delivery of total justice. Therefore, this grant of compensation is sometimes in lieu of sending a person behind bars or in addition to a very light sentence of imprisonment. Hence on default of payment of this compensation, there must be a just recourse. Not imposing a sentence of imprisonment would mean allowing the accused to get away without paying the compensation and imposing another fine would be impractical as it would mean imposing a fine upon another fine and therefore would not ensure proper enforcement of the order of compensation. While passing an order under section 357(3), it is imperative for the courts to look at the ability and the capacity of the accused to pay the same amount as has been laid down by the cases above, otherwise the very purpose of granting an order of compensation would stand defeated.

section 431 clearly provides that an order of compensation under section 357(3) will be recoverable in the same way as if it were a fine. section 421 further provides the mode of recovery of a fine and the section clearly provides that a person can be imprisoned for nonpayment of fine. Therefore, going by the provisions of the code, the intention of the legislature is clearly to ensure that mode of recovery of a fine and compensation is on the same footing. In light of the aforesaid reasoning, the contention of the accused that there can be no sentence of imprisonment for default in payment of compensation under section 357(3) should fail.

Securities LawsSection 2(h) of the Securities Contract Regulation Act, 1956 – Securities Where contract note issued in relation to a transaction does not show that it is a spot delivery contract, transaction will clearly be contrary to Circular [s.O. 2561] dated 2761969; consequently in terms of provisions of subsection (2) of section 16, said transaction will be illegal and not capable of being enforced

Naresh K. Aggarwala v. Canbank Financial Services Ltd, May 5, 2010 (SC)It is clear from the Circular [s.O. 2561] dated 2761969 that after issuance of the Circular, transactions into securities by

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(i) spot delivery contract; (ii) Contract for cash; (iii) Hand delivery and (iv) special Delivery are only permitted.

A perusal of the definition of the term `spot delivery’ is defined in section 2 (i) of the securities Contract Regulation Act, 1956 would show that spot delivery contract is the contract where actual delivery of the securities and the payment of price is either on the same day or on the next day.

The terms, contract for cash, hand delivery or special delivery are not defined by the Act. Therefore, in terms of the circular dated 2761969, if the rules made under the Act, bye laws and Regulations of a recognized stock Exchange permit contract for cash, hand delivery or special delivery, those types of transactions would also be permitted by the circulars.

The definition of the term ‘securities’ as given in section 2(h) of the securities Contracts Regulation Act, 1956 shows that it does not make any distinction between listed securities and unlisted securities and therefore it is clear that the Circular will apply to the securities which are not listed on the stock Exchange. Where the contract note issued in relation to a transaction does not show that it is a spot delivery contract, the transaction will clearly be contrary to the circular. Consequently, in terms of the provisions of subsection (2) of section 16 the transaction will be illegal and is not capable of being enforced.

DRT ActSection 2(g) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 - DebtWhere stock and machineries of tenant which were hypothecated to bank against loan, were sold by owner of premises for realization of rent due with full knowledge of hypothecation, bank could recover sale proceeds along with interest

Eureka Forbes Limited v. Allahabad Bank, May 3, 2010 (SC)The appellant company entered into an agreement with respondent Nos. 2 and 3 a proprietor and his firm, granting licence in their favour to use the premises for a consideration of R12,000/ payable to the appellant, along with the plant and machinery as well as their trade mark “OsbOURNE”. It is further the case of the appellant that they had no knowledge of the fact that, respondent Nos. 2 and 3 had availed certain cash credit facility and had hypothecated their raw materials, semifinished and finished products to respondent bank. After about 4 years, the said respondents requested the appellant to take over the possession of the said premises along with the closing stock lying therein and machines because respondent Nos. 2 and 3 had not paid the licence fee for the use and occupation of the premises. The appellant sold the stocks as well as lathe machine lying in the factory premises and adjusted the sale proceeds thereof towards the arrears of licence fee. The respondent bank raised objection and initiated recovery proceedings.

The appellant argued that, there was no privity of contract and they were not covered under the definition of `debt’, and as such, recovery proceedings could not be initiated, much less, recovery could be effected from them under the provisions of the Act.

The supreme Court held that the goods in question had been sold by the appellant without the consent of the bank. Respondent Nos. 2 and 3 had hardly raised any dispute and resistance, to the claim of the bank. In fact, even before the instant Court there was no representation on their behalf. The documentary and oral evidence on record clearly established that the bank raised a financial claim upon the principal debtor, as well as upon the person who had intermeddled and/or at least dealt with the charged goods without any authority in law. Not only this, the appellant

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had sold the hypothecated goods and stocks by public auction, despite the fact the appellant had due knowledge of the fact that the goods were charged in favour of the bank.

Maxim Nullus commodum capere potest de injuria sua propria has a clear mandate of law that, a person who by manipulation of a process frustrates the legal rights of others, should not be permitted to take advantage of his wrong or manipulations. In the present case Respondent Nos. 2 and 3 and the appellant had acted together while disposing off the hypothecated goods, and now, they could not be permitted to turn back to argue, that since the goods had been sold, liability could not be fastened upon respondent Nos. 2 and 3 and in any case on the appellant.

The bank had come to know, that respondent Nos. 2 and 3 had a leave and license agreement with the appellant. Despite that heavy loan was sanctioned and disbursed to the above respondents. Even thereafter, the bank and its officers/officials appeared to have taken no serious steps to ensure that the goods hypothecated to the bank were not disposed off without its consent. The officers/officials of the bank, even after knowing about the handing over of the possession of the property including the hypothecated goods to the appellant and having communicated the same to the appellant vide their letter dated August 24, 1987, made no serious efforts to recover its debt and ensure that the goods were not disposed off, as the suit itself was filed for recovery of the amount on February 1, 1989 after serious delay.

The appellants would be liable to pay to the respondent bank, the approximate value of the hypothecated stock sold by the appellants with interest at the rate of 6 per cent per annum on the above sum during the period from 1431988, the date of filing of the plaint, to the date of actual realisation.

RTI ActSection 8, read with section 4 of the Right to Information Act, 2005 – Exemption from Disclosure of InformationWhere appellant sought to inspect of case files of third parties relying upon a decision of Central Information Commission but said case had been stayed, appeals were to be dismissed in regard to inspection of case files; however, information sought in respect of procedure for inspection and filing complaints were to be provided

Rakesh Kumar Gupta v. Income Tax Appellate Tribunal, June 22, 2010 (CIC)The Appellant sought inspection of all the records related to some appeal, provide the form, procedure, rules through which third parties are allowed to become intervener and also other procedures. The appellant received a response from CpIO informing him that larger public interest was not established. On appeal, the Appellate Authority issued orders rejecting the appeal.

The Central Information Commission held that none can accept the argument that because the information held by ITAT is in the form of only judicial record, such record is outside the purview of the RTI Act. The supreme Court of India and High Courts, all have rules for disclosure of information both administrative and judicial. The only requirement is that applicant must adhere to the particular rules in making an application under the RTI Act.

In the case of ITAT, which is a part of Government, the rules regarding the means of disclosure of information with regard to carrying out the provisions of the Act and fees / costs to be charged are covered by rules 27(1) and 28 in both of which appropriate Government and the competent authority are defined in sections 2(a) and 2(b). Clearly ITAT will fall under the appropriate Government described in section 2(a).

What appellant sought was inspection of case files of third parties. However, the decision of this Commission upon which appellant has relied, i.e., CIC/Ls/A/2009/000647 dated 14122009 had been stayed. Equally clearly, section 8(1)(j) cannot be applied to the information sought viz.,(i) providing the form, procedure, rules through which third

parties are allowed to become intervener.(ii) providing the procedure (e.g., to whom form of request

letter and deposit challan, etc., are to be deposited) for the inspection and copying fee (for inspection and copies as pre ITAT Rules).

(iii) allowing inspection of all records related to section 4 compliance providing the procedure and person to whom vigilance complaints are to be made for ITAT.

(iv) providing copy of documents including note sheet/orders pointed out at the time of inspection for above requests.Therefore, appeals were to be dismissed in regard

to inspection of case files. However, with regard to the remaining information sought (in respect of procedure, etc., for inspection and complaints) suo moto disclosure of which is mandated by section 4(1)(6)(vii), (xv) and (d) of the Act would be provided to the appellant. n

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INDIRECT TAXESA. SERVICE TAX I. Notification:

1. Notification No. 45/2010 -ST dated 20.07.2010: The Central Government vide the powers conferred by section 11C of the Central Excise Act, 1944 read with section 83 of the Finance Act, 1994 has directed that service tax payable on all taxable services, which was not being levied in accordance with a generally prevalent practice, provided by a person to any other person in relation to:(a) transmission of electricity is not required to be paid for

the period up to 26.02.2010; (b) distribution of electricity is not required to be paid for

the period up to 21.06.2010. It is important to note here that transmission and

distribution of electricity have been exempted from service tax with effect from 27.02.2010 and 22.06.2010 vide Notification No. 11 and 32/2010 respectively.

II. Circulars:1. Circular No. 125/2010-ST dated 30.07.2010 has

been issued to clarified that levy and collection of service tax on state Government agencies/departments implementing centrally sponsored scheme (Css) under a central grant, is not legally tenable and therefore in such cases service tax will not be leviable.

2. Circular No. 126/2010-ST dated 10.08.2010 : The terms ‘underwriting’ and ‘underwriter’ as provided in the Finance Act, 1994 and further defined in the securities and Exchange board of India (Underwriters) Rules, 1993, pertain to dealing in securities of a body corporate. In other words, service tax is leviable on underwriting only when the securities of a body corporate are underwritten.

Though the Government securities are issued by the Reserve bank of India (RbI), which is a ‘body corporate’ in terms of section 3(2) of the RbI Act, 1934, Government securities are not securities of a body corporate as they are sovereign securities having zero default risk and RbI only manages the issue as also the auction of Government securities on behalf of the Government of India.

The primary dealers registered with the RbI (as opposed to registration with the securities Exchange board of India) deal in Government securities, issued by the RbI on behalf of the Government of India, as a part of the Central Government’s market borrowing program.

Therefore, it has been clarified that service tax liability does not arise on Underwriting Fee or Underwriting Commission received by the primary dealers during the course of the dealing in government securities.

B. CUSTOMSI. Notification:

1. Central board of Excise and Customs has amended Courier Imports and Exports (Clearance) Regulations, 1988 vide Notification No. 75/2010 Cus. (N.T.) dated 12.08.2010.

DIRECT TAXES1. Notification No. 50/2010 dated 14-07-2010

In exercise of the powers conferred by clause (xii) of section 80C(2) of the Income-tax Act, 1961, the Central Government has specified the Immediate Annuity plan of the ICICI prudential Life Insurance Company Limited, as approved by the Insurance Regulatory and Development Authority, as the annuity plan for the purpose of the said clause for the assessment year 2007-08 and subsequent years.

2. Notification No. 52/2010 dated 14-07-2010section 10(15)(vii) of the Income-tax Act, 1961 provides

for the exemption of interest on bonds issued by a local authority or by a state pooled Finance Entity and specified by the Central Government by notification in the official Gazette. Accordingly, the Central Government has specified the Tax Free pooled Finance Development bonds under pooled Finance Development scheme of Government of India (second Tranche) carrying an interest rate of upto maximum 8 percent annum to be issued by the Water and sanitation pooled Fund, Tamil Nadu designated as state pooled Finance Entity for the state of Tamil Nadu for the purpose of the said section.

3. Notification No. 59/2010 dated 21-07-2010In exercise of the powers conferred by clause (v) of the

Explanation to section 48 of the Income-tax Act, 1961, the Central Government has notified the Cost Inflation index for the financial year 2010-11 i.e. 711.

4. Notification No. 67/2010 dated 03-08-2010Clauses (a) and (b) of section 80-Ib(10) lays down

certain conditions to be complied with by an undertaking developing and building housing projects for the purpose of claiming deduction under the said section. However, the conditions contained in these clauses would not apply to a housing project carried out in accordance with a scheme framed by the Central Government or a state Government for reconstruction or redevelopment of existing buildings in areas declared to be slum areas under any law for the time being in force and such scheme is notified by the CbDT in this behalf.

Accordingly, the CbDT has notified the scheme contained in Regulation 33(10) of Development Control Regulation for Greater mumbai 1991 read with the provisions of notification no. Tpb-4391/4080(A)/UD-11(RDp) dated June 3, 1992, as a scheme for the purpose of the said section subject to certain exclusions mentioned in the said notification.

The complete text of the above notifications can be downloaded from the website of the Income-tax Department, www.incometaxindia.gov.in and the complete link may be downloaded from the home page of the Direct Taxes Committee of the Institute at: http://www.icai.org/post.html?post_id=965&c_id=57.(matter on Direct Taxes has been contributed by the Direct Taxes Committee of the ICAI)

CIRCULARS/NOTIFICATIONS

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whether all the investor related documents are maintained/available with them and also that in case the investor related documentation was incomplete, the trustees of the mutual funds were advised not to make further payment to such distributors till full compliance/completion of the steps enumerated in the said circular and to send a status to sEbI as and when process is completed to satisfaction. since sEbI has not received any confirmation from the trustees of mutual funds on the completion of the process as mandated, it appears that all the investor related documentation is not available with the AmCs and hence investors’ rights to approach the AmCs directly are restricted and investors are forced to depend on the distributors for executing any financial or non-financial transactions. Now, in order to ensure that investors have unrestricted access to AmCs and to enable AmCs to provide prompt investor service including execution of investors’ financial or non-financial transactions, all mutual funds/AmCs are directed that, (a) all new folios/accounts shall be opened only after ensuring that all investor related

II. Circular:1. Circular No. 23/2010-Cus. dated 29.07.2010

has been issued to clarify that 4 per cent CVD refund claims under Notification No.102/2007-Cus. dated 14.09.2007 and Notification No. 93/2008-Cus. dated 01.08.2008 will be disposed of despite the fact that the assessment continues to be provisional without awaiting for finalization of assessments.

The complete text of the above-mentioned notifications and circulars are available at www.cbec.gov.in (matter on Indirect Taxes has been contributed by the Indirect Taxes Committee of the ICAI)

CORPORATE LAWS1. Updation of Investor Related Documents www.sebi.gov.in

The sEbI has issued Circular No. Cir/ImD/DF/9/2010 dtd. 12.08.2010 in relation to sEbI’s earlier advise to mutual funds to confirm

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documents including account opening documents, IT-pAN, KYC, poA (if applicable), specimen signature are available with AmCs/RTAs and not just with the distributor, and, (b) for existing folios, AmCs shall be responsible for updation of the investor related documents including account opening documents, pAN, KYC, poA (if applicable), specimen signature by 15 November, 2010. sEbI has mandated that the trustees shall submit a confirmation after they receive certification from an independent auditor on completion of this process latest by November 22, 2010. One may refer to the above citation for further details.

2. Amendments to the Takeover Codewww.sebi.gov.in

The sEbI has issued the Report of the Takeover Regulations Advisory Committee on 19.07.2010 which seeks to replace the sEbI (substantial Acquisition of shares and Takeovers) Regulations, 1997 (“the Takeover Code”) in line with international standards and the changing business and economic milieu. The Committee under the Chairmanship of shri C. Achuthan (former presiding Officer of the securities Appellate Tribunal) has comprehensively redrafted the Takeover Code and submitted its report to sEbI. The proposals contained in the Report include those relating to, (a) increase in the threshold limit for a public offer from 15 per cent to 25 per cent, (b) the requirement to give an exit opportunity to 100 per cent public shareholders via a public offer as compared to the minimum 20 per cent now, (c) recognised issues like financing m&A deals under the revised proposals particularly the disadvantaged position of Indian acquirers vis-à-vis foreign acquirers under the extant exchange control regulations, (d) removal of exemption to 25 per cent consideration as non compete payment from inclusion in open offer price, (e) requirement for the target company to be delisted if pursuant to a statutory open offer, the level of the acquirer’s shareholding increases beyond 90 per cent, following the public offer, (f) if the acquirers shareholding is between 75 per cent and 90 per cent, necessary steps would need to be undertaken to bring down their shareholding to 75 per cent, (g) revisions to pricing formula for the open offer, (h) specific provisions on open offer pricing in case of indirect acquisitions which would reduce the ambiguity under the present takeover code. One may refer to the above citation for further details.

3. Arbitration mechanism in stock exchangeswww.sebi.gov.in

The sEbI has issued Circular No. CIR/mRDDsA/24/2010 dtd. 11.08.2010 whereby sEbI has decided to streamline the arbitration mechanism available at stock exchanges for arbitration of disputes (claims, complaints, differences, etc.) arising between a client and a member (stock broker, Trading member and Clearing member) across various market segments. The Circular inter alia deals with maintenance of a panel of Arbitrators, Code of Conduct for arbitrators, appellate panel of arbitrators, arbitration fees, place of Arbitration can be at a regional centre nearest to the client, Implementation of Arbitral

Award in favour of clients, etc. One may refer to the above citation for further details.

4. Regulatory framework for Core Investment Companies www.rbi.gov.in

The RbI has issued Notification No. 197/03.10.001/ 2010-11 dtd. 12.08.2010 in relation to companies which have their assets predominantly as investments in shares for holding stake in group companies but not for trading, and also do not carry on any other financial activity, i.e., Core Investment Companies, (CICs), justifiably deserve a differential treatment in the regulatory prescription applicable to Non-banking Financial Companies (NbFCs) which are non-deposit taking and systemically important. In order to rationalise the policy approach for CICs, such companies having an asset size of R100 crore and above would be treated as systemically important core investment companies and would require registration with the Reserve bank and would be given exemption from maintenance of net owned fund and exposure norms subject to certain conditions. With this Notification, the regulatory framework is brought into effect. It is provided that CICs were not considered as carrying on the business of acquisition of shares and securities in certain circumstances, which were having, (a) not less than 90 per cent of their assets were in investments in shares for the purpose of holding stake in the investee companies, (b) they were not trading in these shares except for block sale (to dilute or divest holding), (c) they were not carrying on any other financial activities, and, (d) they were not holding/accepting public deposits. Also, it is provided that since it is very difficult to determine whether a company has invested in the shares of another company for the purpose of holding stake or for the purpose of trade, it was therefore decided that investing in shares of other companies, even for the purpose of holding stake should also be regarded as carrying on the business of acquisition of shares in terms of section 45I(c)(ii) of RbI Act. Hence, CICs will be required to obtain certificate of registration under the RbI Act, 1934, but, CICs with an asset size of less than R100 crore would be granted exemption from the applicability of registration requirements. CICs having asset size of 100 crore or above, being systemically important CICs (CIC-ND-sI) will be required to obtain registration certificate under section 45-IA of the RbI Act and be governed by the provisions of the RbI Act, 1934 and the directions issued by the RbI from time to time. Every CIC-ND-sI shall ensure that at all times it maintains a minimum Capital Ratio whereby its adjusted net worth shall not be less than 30 per cent of its aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items as an the date of the last audited balance sheet as at the end of the financial year. Every CIC-ND-sI shall ensure that its outside liabilities at all times shall not exceed 2.5 times its adjusted net worth as on the date of the last audited balance sheet as at the end of the financial year. A CIC-ND-sI which adheres to the requirements regarding capital requirements and leverage ratio as specified above

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may to the extent necessary, be exempted from compliance with, (a) maintenance of statutory minimum Net Owned Fund (NoF), and, (b) requirements of “Non-banking Financial (Non-Deposit Accepting or Holding) Companies prudential Norms (Reserve bank) Directions, 2007” including requirements of capital adequacy and exposure norms. A transition period is provided for all CICs-ND-sI, irrespective of whether they were specifically exempted in the past from registration with the RbI or not, and which should apply to the RbI for obtaining the registration certificate within a period of six months from the date of the Notification. One may refer to the above citation for further details of the comprehensive and operational aspects of the guidelines.(matter on Corporate Laws has been contributed by CA. Jayesh Thakur) FEMA1. Export of Goods and Services - Unrealized export bills – Write-off - Surrender of export incentives RBI/2010-11/ 123 A.P. (DIR Series) Circular No.03 dated July 22, 2010 (Ref: A.p. (DIR series) Circular No. 12 dated september 09, 2000, A.p. (DIR series) Circular No. 30 dated April 04, 2001, A.p. (DIR series) Circular No. 61 dated December 14, 2002, A.p. (DIR series) Circular No. 40 dated December 05, 2003 and A.p. (DIR series) Circular No. 33 dated February 28, 2007)

As per the above referred circulars the requests for “write-off” made by the exporters were permitted to be acceded by the AD Category – I banks only on surrender of proportionate export incentives by the exporter.

In accordance with the extant policy realization of export proceeds shall not be insisted upon, under any of the Export promotion schemes under the Foreign Trade policy (FTp), subject to the following conditions:-

i) the write-off on the basis of merits is allowed by the Reserve bank or by the AD Category – I banks on behalf of the Reserve bank, as per the extant guidelines;

ii) the exporter produces a certificate from the Foreign mission of India concerned, about the fact of non-recovery of export proceeds from the buyer; and

iii) this would not be applicable in self-write-off cases. The above relaxation is applicable for the exports made

with effect from August 27, 2009. It is clarified the drawback amount has to be recovered

even if the claim is settled by the Export Credit Guarantee Corporation of India Limited (ECGC) or the write–off is allowed by the Reserve bank. 2. External Commercial Borrowings (ECB) Policy –Take-out Finance RBI/2010-11/124 A.P.(DIR Series) Circular No.04 dated July 22, 2010

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(Ref: A.p. (DIR series) Circular No. 5 dated August 1, 2005 and A.p (DIR series) Circular No. 39 dated march 29, 2010 relating to the External Commercial borrowings (ECb).)

It has been decided to permit take-out financing arrangement through ECb, under the approval route, for refinancing of Rupee loans availed of from the domestic banks by eligible borrowers in the sea port and airport, roads including bridges and power sectors for the development of new projects, subject to the following conditions:

i. The corporate developing the infrastructure project should have a tripartite agreement with domestic banks and overseas recognized lenders for either a conditional or unconditional take-out of the loan within three years of the scheduled Commercial Operation Date (COD). The scheduled date of occurrence of the take-out should be clearly mentioned in the agreement.

ii. The loan should have a minimum average maturity period of seven years.

iii. The domestic bank financing the infrastructure project should comply with the extant prudential norms relating to take-out financing.

iv. The fee payable, if any, to the overseas lender until the take-out shall not exceed 100 bps per annum.

v. On take-out, the residual loan agreed to be taken- out by the overseas lender would be considered as ECb and the loan should be designated in a convertible foreign currency and all extant norms relating to ECb should be complied with.

vi. Domestic banks/Financial Institutions will not be permitted to guarantee the take-out finance.

vii. The domestic bank will not be allowed to carry any obligation on its balance sheet after the occurrence of the take-out event.

viii.Reporting arrangement as prescribed under the ECb policy should be adhered to.

All other aspects of ECb policy, such as, UsD 500 million limit per company per financial year under the automatic route, eligible borrower, recognised lender, end-use, average maturity period, prepayment, refinancing of existing ECb and reporting arrangements remain unchanged.

3. Guidelines on trading of Currency Options on Recognised Stock / New Exchanges RBI/2010-11/147 A.P. (DIR Series) Circular No.05 dated July 30, 2010 Ref: The Foreign Exchange management (Foreign Exchange Derivative Contracts) Regulations, 2000 dated may 3, 2000 [Notification No. FEmA/25/Rb-2000 dated may 3, 2000], as amended from time to time and A.p. (DIR series) Circular No. 05 dated August 6, 20081. In order to expand the existing menu of exchange

traded hedging tools, it was announced in the monetary

policy statement 2010-11 (para 62) that recognised stock exchanges would be permitted to introduce plain vanilla currency options on spot Us Dollar/ Rupee exchange rate for residents. Accordingly, it has been decided to permit trading of currency options on spot UsD-INR rate in the currency derivatives segment of the stock exchanges, recognized by the securities and Exchange board of India (sEbI).

2. persons resident in India are permitted to participate in the currency options market, subject to the directions contained in the Exchange Traded Currency Options (Reserve bank) Directions, 2010, [Notification No.FED.01 / ED (HRK)-2010 dated July 30, 2010] (Directions) issued by the Reserve bank of India.

4. Establishment of Branch Offices (BO) / Liaison Offices (LO) in India by Foreign Entities – Delegation of PowersRBI/2010-11/ 154 A.P. (DIR Series) Circular No. 06 dated August 09, 2010

In view of the difficulties expressed by some Liaison Offices / branch Offices in submitting the Annual Activity Certificates (AACs) within the prescribed period i.e. on or before April 30 every year, it has been decided to review the current calendar for the same. Accordingly, the AACs from the Auditors, as at end of March 31, along with the audited Balance Sheet may be submitted on or before September 30 of that year. In case the annual accounts of the LO/ bO are finalized with reference to a date other than march 31, the AAC along with the audited balance sheet may be submitted within six months from the due date of the balance sheet.

All the other instructions of A.p. (DIR series) Circular No.24 dated December 30, 2009 shall remain unchanged.

5. Buyback / Prepayment of Foreign Currency Convertible Bonds (FCCBs) RBI/2010-11/ 158 A.P. (DIR Series) Circular No.07 dated August 09, 2010Ref: A.p. (DIR series) Circular No. 44 dated march 29, 2010

On a review of the policy and in view of the representations received from the issuers of FCCbs, the due date for considering the applications, under the approval route, for buyback of FCCbs, has been extended from June 30, 2010 to June 30, 2011, provided the issuers comply with all the terms and conditions of buyback/ prepayment of FCCbs, as prescribed.

The complete text of the above-mentioned circulars and notifications on FEmA can be downloaded from the link: http://www.rbi.org.in

(matter on FEmA has been contributed by CA. manoj shah and CA. Hinesh Doshi) n

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A. Facts of the Case1. A limited company having its registered office in India

is a group member of a transnational player in the global gases and engineering industry. The company’s gases division is engaged in the manufacture and sale of industrial, medical and special gases to customers across industries. The company also has a project Engineering Division which executes turnkey projects for both in-house and third parties.

2. The querist has stated that the company has an established customer base in steel industry as oxygen is required in large quantities for steel making. based on Long Term Agreements (LTAs), typically of 15 to 20 years’ duration, entered into with such steel companies, plants owned by the company, are built within the customer’s premises for ‘across the fence’ supplies of gases to them as well as to other customers in the merchant market in the region. such build-Own-Operate (bOO) schemes for gas supplies to major customers, particularly in the steel industry, is an established business model for the company. Time being the essence of such schemes where any delay by the company in building and commissioning of its plants to commence supplies of gases to its customers on dates as mentioned in the LTAs could cause substantial financial losses to them and vice-versa, stringent liquidated damage clauses for delays by either party feature prominently in LTAs.

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

4. As per the agreement, the target commencement date was 31st march, 2008, being the date on which the company estimated that it would be able to start fulfilling

The following is the opinion given by the Expert Advisory Committee of the Institute in response to a query sent by a member. This is being published for the information of readers.

Treatment of liquidated damages payable for delay in commissioning of plant.

its obligation to supply gas from the plant. However, as per the querist, due to delay by the main equipment supplier of the plant and other related problems at site, the company was not ready to commission the plant and commence supplies on the target commencement date and instead, was ready for supply of gases only in November 2008. At this stage, due to the economic downturn, the customer requested to further delay the start-up of the plant which was finally commissioned in February 2009.

5. The company capitalised the total cost of the project in its books of account in march 2009 after trial runs of the plant were successful. The company follows the calendar year as its financial year. The querist has stated that the company is now in the process of negotiating a settlement with the customer for the delays in plant commissioning on both its own as well as on the customer’s part. As a result of such negotiation, the company will have to pay late start liquidated damages to the customer for the delayed commissioning of the plant due to its inability to have the plant ready for supply of gases on the appointed target commencement date of 31st march, 2008.

6. The querist has drawn the attention of the Committee to paragraph 20 of Accounting standard (As) 10, ‘Accounting for Fixed Assets’, which states as under:

“20. The cost of a fixed asset should comprise its purchase price and any attributable cost of bringing the asset to its working condition for its intended use.”

As per the querist, the plant was brought to its working condition

for its intended use, i.e., for supply of gas to the customer in November 2008. The point for consideration is whether liquidated damages payable for delay in commissioning the plant should be treated as cost attributable for bringing the plant to its working condition for its intended use (supply of gas to the customer) within the ambit of paragraph 20 of As 10.

B. Query7. based on the facts stated above, the querist has sought

the opinion of the Expert Advisory Committee on the following issues:

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(a) Whether the amount to be paid by the company on account of liquidated damages due to delay in commencement of supply of gases to the customer consequent upon delay in bringing the plant to its working condition on the appointed target commencement date can be capitalised in its books of account as additional cost attributable to the project (capitalised in march 2009) in accordance with the provisions of As 10 and any other related Accounting standard or statute.

(b) If the answer to (a) above is in the negative, whether the liquidated damages payable can be treated as deferred revenue expenditure to be amortised over a period of 3 to 5 years after the commencement of commercial production.

(c) If the answer to (b) above is also in the negative, whether the only option available to the company will then be to charge off the amount of liquidated damages as an expense in the profit and loss account .

(d) Generally, on any other issue related to the subject.

C. Points considered by the Committee8. The Committee notes that the basic issue raised in the

query relates to the treatment of liquidated damages payable by the company for delay in commissioning of the plant. The Committee has, therefore, considered only this issue and has not touched upon any other issue that may arise from the Facts of the Case, such as, appropriateness of capitalisation of the plant by the company in march 2009, compensation receivable by the company, if any, on account of request by the customer to delay the start-up of the plant, compensation receivable by the company, if any, for the delay by the main equipment supplier of the plant, expenses incurred during the period the plant is ready to commence production and the actual date of commencement of production, etc.

9. The Committee notes from the Facts of the Case that the plant has been constructed by the company under bOO scheme. Therefore, in the view of the Committee, the provisions related to self-constructed assets would apply in the present case. In this context, the Committee notes paragraph 20 of As 10 as reproduced by the querist in paragraph 6 above, and paragraph 21 of As 10 which is reproduced below:

“21. The cost of a self-constructed fixed asset should comprise those costs that relate directly to the specific asset and those that are attributable to the

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construction activity in general and can be allocated to the specific asset.”

The Committee further notes that paragraph 10.1 of As 10 provides that in arriving at the gross book value of self-constructed fixed assets, the same principles apply as those described in paragraphs 9.1 to 9.5. The Committee notes that paragraph 9.1 is relevant to the case under consideration which states as below: “9.1 The cost of an item of fixed asset comprises

its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. Examples of directly attributable costs are:(i) site preparation;(ii) initial delivery and handling costs;(iii) installation cost, such as special foundations

for plant; and(iv) professional fees, for example fees of architects

and engineers.

The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account of exchange fluctuations, price adjustments, changes in duties or similar factors.”

10. The Committee notes from the Facts of the Case that the ‘late start liquidated damages’ are payable by the company on account of delay in the commencement of gas supply from the plant on the target commencement date. The Committee is of the view that such expenditure cannot be said to be attributable to bringing the plant to its working condition for its intended use. such expenditure is not attributable to the construction activity. It is also not in the nature of price adjustment on account of which cost of a fixed asset may undergo a change subsequent to its construction. The Committee is of the view that the liquidated damages are of the nature of a penalty resulting from non-fulfillment of the terms of the agreement, in this case, the target date of commencement of gas supply. The amount of liquidated damages is a compensation to the customer for loss of revenue on account of non-supply of gas by the company. Accordingly, the Committee is of the view that such expenditure cannot be capitalised and should be expensed by way of charge to the profit and loss account as no future benefit is expected from the same.

D. Opinion 11. On the basis of above, the Committee is of the following

opinion on the issues raised in paragraph 7 above:(a) The amount to be paid by the company on account of

liquidated damages due to delay in commencement of supply of gases to the customer consequent upon delay in bringing the plant to its working condition on the appointed target commencement date cannot be capitalised in its books of account as additional cost attributable to the project (capitalised in march 2009) in accordance with the provisions of As 10 or any other Accounting standard or statute.

(b) The liquidated damages payable cannot be treated as deferred revenue expenditure to be amortised over a period of 3 to 5 years after commencement of commercial production as explained in paragraph 10 above.

(c) The company should charge off the amount of liquidated damages as an expense in the profit and loss account.

(d) The Committee, as per its Advisory service Rules, answers only specific queries raised by the querist on accounting and/or auditing principles and allied matters and as a general rule, the Committee does not answer open-ended general queries. see paragraph 8 above.

1 The Opinion is only that of the Expert Advisory Committee and does not necessarily represent the Opinion of the Council of the Institute.

2 The Opinion is based on the facts supplied and in the specific circumstances of the querist.

3 The Compendium of Opinions containing the Opinions of Expert Advisory Committee has been published in twenty-seven volumes which are also available in the form of a CD. Each volume of the Compendium and the CD are available for sale at the Institute’s office at New Delhi and its regional council offices at mumbai, Chennai, Kolkata and Kanpur. The CD can also be accessed at the Institute’s website, www.icai.org

4 Recent opinions of the Committee are available on the website of the Institute under the head ‘Resources’.

5 Opinions can be obtained from EAC as per its Advisory service Rules which are available on the website of the ICAI, under the head ‘Resources’. For further information, write to [email protected]

n

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Introduction to IFRSThe pace of development in financial reporting has accelerated sharply during the last few years, especially since the decision of the European Commission to force the consolidated financial statements of listed companies to be prepared under the auspices of the International Accounting Standards Board (IASB) from 2005 onwards, which has sole responsibility for establishing International Financial Reporting Standards (IFRSs). Other components of the structure are the Trustees of the IASC Foundation, the IFRIC and the Standards Advisory Council (SAC). Read on to know more.

the International Accounting standards board (IAsb) held its first official meeting in London in April 2001, where it was resolved that all standards and Interpretations issued by the International Accounting standards Committee (IAsC) should continue to be applicable unless and until they are amended or withdrawn. It was agreed that the new IAsb standards would be

called International Financial reporting standards (IFrss). When the term IFrs is used, it includes standards and interpretations approved by the IAsb and the International Accounting standards (IAs), and interpretations issued by the International Financial reporting Interpretations Committee (IFrIC). the revised structure of the IAsC is illustrated below:

CA. Aditya Singhal (The author is a member of the Institute. He can be reached at [email protected])

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tHe CHArtereD ACCOUNtANt september 201046

IFrs 1 deals with the basic defi-nitions, scope, accounting policies, exceptions and lot of other things. IAsb issued IFrs 1 in June 2003, which replaced sIC (standing Interpretations Committee)-8 First-time Application of IAss as the primary basis of accounting. the board developed the IFrs to address concerns about the full retrospective application of IFrss required by sIC-8. subsequently, IFrs 1 was amended many times to accommodate first-time adoption requirements resulting from new or amended IFrss. As a result, the IFrs became more complex and less clear. In 2007, therefore, the board proposed as part of its annual improvements project to change IFrs 1 to make it easier for the reader to understand and to design it to better accommodate future changes. the version of IFrs 1 issued in 2008 retains the substance of the previous version, but within a changed structure. It replaces the previous version and is effective for entities applying IFrss for the first time for annual periods beginning on or after July 1, 2009. earlier application is permitted.

thus, before understanding more about IFrs, we first need to understand what is IFrs and what is the scope of IFrs, i.e. which entities need to follow IFrs.

IFRSs[IFrs 1 (Appendix A)] standards and Interpretations adopted by the IAsb. they comprise:a) IFrs;b) IAs; andc) Interpretations developed by the

IFrIC or the former sIC.the objective of IFrs 1 is to ensure that an entity’s first IFrs financial statements and its interim financial reports for part of the period covered by those financial statements contain high-quality information that:a) Is transparent for users and

comparable over all periods presented;

b) provides a suitable starting point for accounting in accordance with the IFrss; and

c) Can be generated at a cost that does not exceed the benefits.

Use and Scope of IFRSrecent years have seen a rapid expansion in the number of countries applying IFrss. Overall, the IFrs are used by listed entities in over 110 countries, and by unlisted entities in over 80 countries. Detailed country-by-country list of the status of adoption of IFrss is available at www.Isaplus.com.

From the Indian perspective, the core group constituted by the ministry of Corporate Affairs recently at its meeting held on January 11, 2010, has agreed for two sets of the accounting standards. the first set converges with the IFrs applicable to some specified companies and second set to other companies including smes.

In the first set of standards, IFrss would be applicable into three phases:a) In phase I, it would be applicable

w.e.f April 1, 2011, to: i. Companies which are part of

Nse - Nifty 50 & bse - seNeX 30,

ii. Companies whose shares or other securities are listed on stock exchanges outside India and

iii. Companies, whether listed or not, which have a net worth in excess of R1000 crore.

b) In phase II, it would be applicable w.e.f April 1, 2013, to the companies whether listed or not, having a net worth exceeding `500 crore but not exceeding `1000 crore.

c) In phase III, it would also be applicable w.e.f April 1, 2014, to all the remaining listed companies having net worth less than `500 crore.

In 2007, the International Accounting Standards

Board proposed as part of its annual improvements project to change the IFRS 1 to make it easier for the reader to understand and to design it to better accommodate future changes. The version of IFRS 1 issued in 2008 retains the substance of the previous version, but within a changed structure. It replaces the previous version and is effective for entities applying IFRSs for the first time for annual periods beginning on or after July 1, 2009. Earlier application is permitted.

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Under the second set, IFRS would not be applicable to:a) the non-listed companies which

have net worth of `500 crore or less and whose shares or other securities are not listed on stock exchanges outside India

b) small-size companies [Investment in plant and machinery > `25 lakh < `5 crore]

c) medium-size companies [Invest-ment in plant and machinery > `5 crore < `10 crore]

please note above companies need to follow International Generally Accepted Accounting principles (IGAAp) as issued by the Institute of Chartered Accountants India (ICAI).

If any country has agreed to adopt IFrs, the IFrs 1 defined the scope of IFrs as below for eligible entities in the country.

An entity shall apply IFRS 1 in:a) Its first IFrs financial statements,

andb) each interim financial report, if any,

that it presents in accordance with IAs 34 Interim Financial reporting for part of the period covered by its first IFrs financial statements.An entity’s first IFrs financial

statements are the first annual financial statements in which the entity adopts the IFrss by an explicit and unreserved statement in those financial statements of compliance with the IFrss. Financial statements in accordance with the IFrss are an entity’s first IFrs financial statements if, for example, the entity:a) presented its most recent previous

financial statements:i. In accordance with national

requirements that are not consistent with the IFrss in all respects;

ii. In conformity with the IFrss in all respects except that the financial statements did not contain an explicit and unreserved statement that they complied with the IFrss;

iii. Containing an explicit statement of compliance with some, but not all IFrss;

iv. In accordance with national requirements inconsistent with the IFrss using some individual IFrss to account for items for which national requirements did not exist; or

v. In accordance with national requirements, with a recon-ciliation of some amounts to

the amounts determined in accordance with IFrss;

b) prepared financial statements in accordance with the IFrss for internal use only without making them available to the entity’s owners or any other external users;

c) prepared a reporting package in accordance with the IFrss for consolidation purposes without preparing a complete set of financial statements as

d) Did not present financial state-ments for previous periods.

IFRS 1 also gives example of when it does not apply. These are when an entity: a) stops presenting financial

statements in accordance with national requirements, having previously presented them as well as another set of financial statements that contained an explicit and unreserved statement of compliance with the IFrss;

b) presented financial statements in the previous year in accordance with national requirements and those financial statements contained an explicit and unreserved statement of compliance with the IFrss; or

c) presented financial statements in the previous year that contained an explicit and unreserved statement of compliance with the IFrss, even if the auditors qualified their audit report on those financial statements.IFrs 1 does not apply to changes

in accounting policies made by an entity that already applies the IFrss. such changes are the subject of:a) requirements on changes in

the accounting policies in IAs 8 accounting policies, changes in accounting estimates and errors; and

b) specific transitional requirements in other IFrss. n

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International Financial Reporting Standards: The Future of Indian GAAPAccounting and business are interrelated in IFRS. Changes in IFRS are pervasive and not limited to accounts department. IFRS is a principle-based model as compared to rule-based Indian GAAP. IFRS requires extensive use of fair valuations for measurement of assets and liabilities. The objective of IFRS is to set the balance sheet right, and hence a significant volatility may come in profit & loss statement. There are three principles laid down in IFRS, i.e. substance over form, use of fair value and recognising time value of money. This article presents an analysis of the concept.

IFRs is a principle-based model as compared to rule-based Indian GAAp. IFRs requires extensive use of fair valuations for measurement of assets and liabilities. The objective of IFRs is to set the balance sheet right, and hence a significant volatility may come in profit & loss statement.

There are three principles laid down in IFRs, i.e. substance over form, use of fair value and recognising time value of money.

profit planning and budgeting need to be tuned to incorporate the expected increase in income volatility, arising out of fair valuation system. staff would need training not only in IFRs accounting but also the changes in the products and processes entailed by the conversion

Under IFRs, there is need to apply professional judgment consistent with intent and spirit of standards.

Various countries have adapted to IFRs in different ways, often embedding local cultures and that is why there are no standard rules but broad principles which define the outer boundary of accounting.

IFRs questions valuation of fixed assets on historical cost basis, questions application of uniform rates of depreciation on all components of a fixed asset as also the amortisation of intangible assets such as goodwill or patents.

In IFRs off-balance sheet trans-actions had been made as part of accounts; it brings a whole new meaning to the reported numbers.

CA. Shalini Tibe(The author is a member of the Institute. She can be reached at [email protected])

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It defines control of entities not through percentage of holdings but by the decision-making power inherent in the parent company.

Top management has, thus, to work out new targets of earnings depending on the direction of impact caused by the new accounting principles.

Earnings will no more be a steady figure that can be easily targeted depending as it is not just on sales and expenses but also changes in asset values and the ability to measure those correctly.

Key Differences in IFRS vis-a-vis Indian GAAP• Concept of group – Companies

Act treats Indian companies as separate legal entity whereas IFRs promotes a group concept

• Fair Valuation – IFRs based on fair value concept and not historical cost

• Form and substance of financial statements

• Correction of past errors – Under IFRs, these are incorporated in the accounts of the years it pertains to, even if audited and adopted by shareholders whereas, under Indian GAAp, these are treated as adjustment in the current year

• Depreciation on revalued assets needs to be routed through income statement under IFRs – Companies Act disallows such a treatment

• Companies Act defines assets by classes which can be depreciated at given rates, whereas as IFRs promotes the concept of components of fixed assets based on their usefulness

• preference shares are classified as debt instrument and not equity effecting profitability and capital adequacy ratio

• No concept of proposed dividend – Declaration of dividend only when approved by shareholders

Effect of Dividend:

With India going global, corporate management is now feeling the pressure for reforming accounting practices and level of transparency arising from lenders, regulatory agencies, financial analyst and above all board of directors who realise that it is the quality of information which will determine how efficiently they have discharged their responsibilities towards the good corporate governance.

There is no doubt in that the IFRs results into better accounting quality. There is more detailed disclosure under IFRs as compared to what companies do under the Indian GAAp.

Every organisation will have to review their business policy and procedures, valuation models, agreements, etc. Instead in many organisations, most of them are carried forward from year to year.

Financial statement will include:• Consolidated income statement • Consolidated statement of other

comprehensive income• Consolidated balance sheet• Consolidated statement of cha-

nges in equity• Consolidated cash flow statement

Comprehensive income includes:• Profit/loss for the year from

continuing operations• Profit/loss for the year from

discontinuing operations

There are differences in IFRS vis-a-vis Indian GAAP in

respect of many areas such as concept of group, fair valuation, treatment of fixed assets, prior period items, proposed dividend, preference share capital, etc. There is no doubt in that the IFRS results into better accounting quality. There is more detailed disclosure under IFRS as compared to what companies do under the Indian GAAP.

• OtherComprehensiveincome• Exchangedifferences intrans-

lating foreign operations• Gain/lossonfairvaluechanges

in AFs financial instruments, cash flow hedges

• Actuarial gain/loss on definedbenefit pension plans

• Shareofothercomprehensiveincome of associates

• Incometaxrelatingtoitemsofother comprehensive income

• Total comprehensive income forthe yearIn the Indian GAAp, the balance

sheet format is to start with liabilities. Within the liabilities, the capital is shown first. After the liabilities, the asset is shown.

Under IFRS, the treatment is reverse:• Firstassetsintheorderofliquidity.• Nextisliabilityandtostartwithall

the borrowings are taken first.• Lastitemwillbeequitycapital,which

is the net worth of the entities.

Areas of difference

IFRS Indian GAAP

Time of accounting of Final Dividend

Year in which it is proposed. It is non-adjusting event

Year for which it is proposed. It is adjusting event

Disclosure Deduction in statement of changes in shareholders Equity

Appropriation of profits

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Component accounting requires that if an asset has

several components, which can be physically separated from the principal asset and which have significantly different useful life. These should be recognised separately and should be depreciated based on their respective useful lives. Firstly start allocating amount to significant parts and depreciate separately. Then group together significant parts with same useful life and depreciation methods. The remainder of the item is to be also depreciated separately.

Treatment of Tangible Assets Under IFRSproperty, plant and equipment (ppE) represent assets that the enterprise uses for production or administration. It does not intend to sell those assets in the normal course of business. Examples of ppE are land, building, machinery, furniture, vehicles and computer.

First time adoption of IFRS for PPEAn entity can use fair value as deemed cost on first-time adoption of IFRs. Or,

It has to apply retrospective application which means recalculate carrying amount of each ppE item according to IFRs since its purchase date including transaction cost, useful life and residual value.

Suggestion: However, fair value as deemed cost is more appropriate since there would be practical difficulties for companies to do retrospective application from the date when the asset has been purchased.

Fair value for PPEFair value for land and buildings is usually determined from market-based evidence by appraisal normally undertaken by professionally qualified valuation officers and for other items of ppE their market value is determined by appraisal.

If there is no market-based evidence of fair value because of special nature of asset, it has to be determined on basis of either Income Approach or Depreciated Replacement Cost Approach.

Methods for subsequent measurement of PPEThere are two methods available for subsequent measurement of ppE, i.e. Revaluation model and Cost model.However, most of the LSE-listed

companies have adopted Cost model.

Generally, companies who are in business of Investment property prefer revaluation model.

Suggestion: Cost model is pref-erable over revaluation model mainly because of the following reasons:• Oncerevaluationmodelisadopted

one has to do frequent revaluation as prescribed by IAs 16 which requires expertise of professional valuer which may not be cost effective for companies.

• Alsoifthepropertypriceschangesdrastically one has to book the difference in Income statement resulting in huge volatility which may not be accepted to management of company.

Reclassificationmovement from Cost model to revaluation model is permitted however vice versa is not permitted which means if Revaluation model once followed cannot move to Cost model.

Suggestion:Companies should care-fully examine the impact before making policy and procedures in respect of the same.

Main Difference between Indian GAAP and IFRS for Fixed Assets/Property, Plant & Equipment1. Under Indian GAAp, the

terminology used is Fixed Assets whereas, under IFRs, it is termed as property, plant and Equipment.

2. standard IAs 16 covers property, plant and Equipment (ppE) whereas there are two standards for Fixed Assets under Indian GAAp, i.e. As-10 Fixed Assets and As-6 Depreciation.

3. As per Indian GAAp, subsequent expenditure related to item of fixed assets are to be capitalised only if they increase the future benefit from the existing asset beyond its previously assessed standard of performance whereas, under IFRs,

subsequent costs are evaluated on the basis of same recognition principles as that of initial cost for recognising as item of ppE.

4. Under IFRs, cost of major inspe-ctions should be capitalised whereas, under the Indian GAAp, there is no specific provision for the same.

5. IFRs for ppE is based on component approach. Under this approach, “Each part of an item of ppE with a cost that is significant in relation to the total cost of the item shall be depreciated separately” whereas the Indian GAAp does not mandatory require full adoption of the component approach.

6. Under IFRs, the residual value and useful life of an asset be reviewed at least each financial year end and if it differs from previous estimate, it is considered as change in accounting estimate whereas such a review is not required under the Indian GAAp.

7. Change in depreciation method is considered as change in accounting estimate under IFRs, whereas, under the Indian GAAp,

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it is considered as change in accounting policy.

8. IFRs requires an entity to choose either the cost model or the revaluation model as its accounting policy and to apply that policy to entire class of ppE. Under Revaluation model, revaluation will be with respect to fair value of item of ppE. It also says that revaluation shall be made with sufficient regularity to ensure that the carrying amount does not materially differ from the fair value as at the balance sheet date whereas, under the Indian GAAp, Revaluation Approach does not specifically state adoption of fair value basis and also about frequency of revaluation of assets.

Judgment required for applying depreciation rates and method:When deciding on depreciation rates and method, most common factors that can be taken into account are expected rate of technological developments, expected market requirement and the expected pattern of usage of the assets.

Review of residual lifeWhen reviewing residual values, an entity would estimate the amount that it would currently obtain for the disposal of the asset after deducting the estimated cost of disposal if the asset were already of the age and condition expected at the end of its useful economic life.

IFRs for ppE is based on Component Approach. Under this approach, “Each part of an item of ppE with a cost that is significant in relation to the total cost of the item shall be depreciated separately.”

The challenge is to determine the extent to which the asset should be broken down into components for

the purpose of separate recognition.

How to Do Component Accounting?Component accounting requires that if an asset has several components, which can be physically separated from the principal asset and which have significantly different useful lives, the components should be recognised separately and depreciated based on their respective useful lives.

Firstly, start allocating amount to significant parts and depreciate separately. Then group together significant parts with same useful life and depreciation methods.

The remainder of the items is to be also depreciated separately. Remainder consists of parts that are individually not significant.

Regular major inspection perf-ormed can also be considered as component of an item of ppE and can be depreciated separately.

For instance:suppose cost of acquisition of building is `100,000 allocated to following components:

Above is an illustrative example. An opinion of expert valuers has to be sought for above information by companies for component accounting.

Replacement of components of PPE:• Capitalise the cost of replacing

major component as separate assets such as replacement of elevators.

• Net book value of old component

is removed. • Routine repair and maintenance

expenditure is to be expensed as incurred.

Link between Depreciation and Impairment under IFRS

When an item of property, plant and Equipment (ppE) is impaired, i.e. recoverable amount < carrying amount, carrying amount is reduced to the amount of recoverable amount.

Asset should no more be carried more than their recoverable amount. such a decrease in carrying amount is impairment and is booked in profit and loss.

After recognition of an impairment loss, the depreciation charge of the asset shall be adjusted in the future periods to allocate the asset’s revised carrying amount over its remaining useful life.

Example 1:An entity acquires equipment for `100.Economic life of equipment is 10 years but entity’s policy is to renew such equipment every 5 years, i.e. useful life is 5 years.Residual value = 20

Depreciation Plan:

Under IFRs, there is need to review estimate of residual value at each financial year end whereas, under Indian GAAp, there is no need for an annual review. below example illustrates depreciation plan when there is change in estimate of residual value.Suppose in Example 1, residual value estimated in year 4 is 10:

Component Amount Depreciation period

Interior 10000 5 years

Restoration 12000 10 years

Elevators 15000 15 years

building 63000 30 years

Year Depreciation Charge

Accumulated Depreciation

Carrying amount at year end

1 (100-20)/5=16 16x1 = 16 100-16 = 84

2 (100-20)/5=16 16x2 = 32 100-32 = 68

3 (100-20)/5=16 16x3 = 48 100-48 = 52

4 (100-20)/5=16 16x4 = 64 100-64 = 36

5 (100-20)/5=16 16x5 = 80 100-80 = 20

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There are three approaches to value intangible assets

which are ‘Market Approach’, ‘Cost Approach,’ and ‘Income Approach’. Market approach is considered first in hierarchy for determining fair value. It assumes comparable market transactions, comparable company transaction or stock market quotations. But this approach is not considered as effective most intangible assets and intellectual property because of lack of market information available. Income approach is mostly suitable for appraisal for assets such as contracts, licenses and royalty agreements, patents and trademarks.

Depreciation Plan:

Under IFRs, there is a need to review the estimate of useful life at each financial year end whereas, under Indian GAAp, there is no need for an annual review. below example illustrates depreciation plan when there is change in estimate of useful life.Suppose now in Example 1, the useful life is revised in year 3 as 4 years:

Depreciatiotn Plan:

suppose in Example 1, depreciation test is performed in year 3 and estimation of recoverable amount at year end is 45.

Now, if you see in Example 1 above the Net book value at year end 3 is 52.

Thus Impairment is 52-45 = 7

Intangible AssetsAn intangible asset is an identifiable non-monetary asset without physical substance and shall have control over a resource, and existence of future economic benefits or service potential.

An entity controls an asset if the entity has the power to obtain the future economic benefits or service potential flowing from the underlying resource and to restrict the access of others to those benefits or that service potential.

The capacity of an entity to control the future economic benefits or service potential from an intangible asset would normally stem from legal rights that are enforceable in a court of law. In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not a necessary condition for control because an entity may be able to control the future economic benefits or service potential in some other way.

Common examples are computer software, patents, copyrights, motion picture films, lists of users of a service, acquired licences, acquired import quotas and relationships with users of a service.

Recognition of Intangible AssetsAn intangible asset shall be recognised if, and only if: • It is probable that the expected

future economic benefits or service potential that are attributable to the asset will flow to the entity and

• The cost or fair value of the asset can be measured reliably. An entity shall assess the probability

of expected future economic benefits or service potential using reasonable and supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the useful life of the asset.

An intangible asset shall be measured initially at cost. Where an intangible asset is acquired through a non-exchange transaction, its initial cost at the date of acquisition shall be measured at its fair value as at that date.

Valuation of intangible assetsThere are three approaches to value intangible assets:• market approach• Cost approach• Income approach

Market approach is considered first in hierarchy for determining fair value. It assumes comparable market transactions, comparable company transaction or stock market quotations. but this approach is not considered as effective most intangible assets and intellectual property because of lack of market information available.

There are two techniques for valuation of Intangible assets under Cost approach: consider the historical cost of creating the assets, or, consider the current re-creation cost.

Income approach is mostly suitable for appraisal for assets such as contracts, licenses and royalty agreements, patents and trademarks. It is highly dependent on accuracy




1 (100-20)/5=16 16x1 = 16 100-16 = 84

2 (100-20)/5=16 16x2 = 32 100-32 = 68

3 (100-20)/5=16 16x3 = 48 100-48 = 52

4 (100-48-10)/2=21 48+21 = 69 100-69 = 31

5 100-69-10 = 21 69+21 = 90 100-90 = 10




1 (100-20)/5=16 16x1 = 16 100-16 = 84

2 (100-20)/5=16 16x2 = 32 100-32 = 68

3 (100-20)/5=1616 + 7 = 23

16x3 = 48 48+7 =55

100-55 = 45

4 (45-20)/2=12.5 55+12.5 = 67.5

100-67.5 = 32.5

5 (45-20)/2=12.5 67.5+12.5 = 80

100-80 = 20




1 (100-20)/5=16 16x1 = 16 100-16 = 84

2 (100-20)/5=16 16x2 = 32 100-32 = 68

3 (68-20)/2=24 32+24 = 56 100-56 = 44

4 (44-20)/2=24 56+24=80 100-80 = 20

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As per IAS 18, “Revenue is the gross inflow of economic

benefits during the period arising in course of ordinary activities of an enterprise when those inflow result in increases in equity, other than increases relating to contributions from equity participants.” IAS 18 applies in accounting for revenue arising from ‘sale of goods’, ‘rendering of services,’ ‘royalties & dividends,’ and ‘Interest (Effective Interest Rate)’.

of future sales forecasts and earning projections. Generally forecast over a five year period is used.

Concept of Revenue under IFRSAs per IAs 18, “Revenue is the gross inflow of economic benefits during the period arising in course of ordinary activities of an enterprise when those inflow result in increases in equity, other than increases relating to contributions from equity participants”

IAs 18 applies in accounting for revenue arising from:• sale of goods• Rendering of services• Royalties, dividends• Interest (Effective Interest Rate)

Main exclusion from IAS 18:• Revenue arising from construction

contract• Leaseincome• Dividend arising from equity

method investments• Insurance contracts• Changes in fair value of financial

assets and liabilitiesRevenue shall be measured at fair

value of the consideration received /receivable. Fair value has been defined as the amount for which an asset could be exchanged or liability settled between knowledgeable, willing parties in an arm’s length transaction.

IFRS – Effective Interest Rate (EIR)The Effective Interest Rate (EIR) method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. It is a new concept to the existing Indian GAAp.

This method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income

or interest expense over the relevant period. The EIR used in the allocation process is the rate that exactly discounts estimated future cash flows (receipts or payments) to the net carrying amount of the financial instrument through the expected life of this instrument.

EIR calculation is not the same as for Yield to maturity (YTm). YTm is nothing but the IRR of the bond. but EIR may also include some non-interest components such as loan origination charges and processing fees as part of the effective rate.

Under IFRs, income from loans and receivables has to be recognised through application of effective interest rate.

An illustration given below gives better clarity for calculation of EIR:

Given Data:

Calculation of Internal Rate of Return based on above data:

Thus, IRR will work out to 3.83 per cent.

Thus, companies have to maintain coupon rate as well as EIR which practically for each transaction will be a major task and will add significantly load on the IT systems. n

Nominal value (payable in 5 years' time)

INR 1,250

Loanoriginationfee(inflow) INR 40

Transaction costs (directly related to loan origination, outflow)

INR (90)

Net transaction costs (40-90) INR (50)

Fair value (net of transaction costs and fees) (1250+50)

INR 1,300

Coupon Rate 4.70%

Year 0 -1300

Year 1 (1250*4.7%) 59

Year 2 (1250*4.7%) 59

Year 3 (1250*4.7%) 59

Year 4 (1250*4.7%) 59

Year 5 1250 + (1250*4.7%) 1309

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An Overview of Attestation Services in India

The attestation function is a core competence area of chartered accountant professionals. The society at large is relying on the attestation services for ensuring that the public funds are utilised properly. In case where scams are discovered and millions of dollars gets into wrong hands, we should realise that either there were no attestation services utilised or, if they were, then there were lapses. The need of the hour is to ensure that a significant section of economic activities in the country come under the ambit of independent attestation services. If all the financial transactions are audited properly, no scam can take place in the country, and by ensuring proper utilisation of funds we can improve the lot of our citizens.

New Dawn of Accountancy Profession in IndiaAfter India got Independence in the year 1947, the national leaders realised the need of an organised accounting profession to contribute towards the economic growth and development of the country. Therefore, The Institute of Chartered Accountants of India (ICAI) was established as a statutory body under the Chartered Accountants Act, 1949 (Act No. XXXVII of 1949) for regulating the profession of chartered accountants in India.

Significance of CAs in Attestation Services The key role of profession of chartered

accountants involves checking of all types of financial statements and certifying them. It inter-alia includes services in the nature of statutory Audit, Internal Audit, Inspection Audit, Tax Audit, stock Audit, Certification and allied various other attestation services. since the establishment of ICAI in the year 1949, only the practicing members who are holding either the part time or full time certificate of practice, are empowered to attest and certify various financial statements which are then relied upon by the society/stakeholders. Thus, in a way, this entrusts an absolute exclusivity to chartered accountants in the field of attestation services as described above.

CA. K. L. Chandak(The author is a member of the Institute. He can be reached at [email protected])

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Expertise in the Field of Attestation Services The primary area of expertise rendered to a student of chartered accountancy is with respect to auditing and accounts. but due to exceptional quality of the course, the student gains substantial expertise in the allied areas of the Companies Act, Income Tax, Wealth Tax, Gift Tax, service Tax, Excise & Customs, sales Tax, FEmA and lot of other enactments which directly or indirectly affects financial transactions. The reason for such a vast course being that a chartered accountant has to take a view in totality and need to be capable of understanding the larger picture before forming a view on the micro topic. This provides him ability to understanding complex situation involving various enactments effecting a certain transaction and ensures that the position is reflected as desired and any violation of any provisions can be highlighted.

Expanded Area of Services in Various Allied AreasAs the path to chartered accountancy enables a professional student clear

At the time of setting up of the ICAI, it was thought beyond

doubt that the attestation services shall be carried out and treated as profession and not as a business. Therefore, there was no scope for advertisement, etc., for attestation services. Even the size of name board was kept to a limited size just to reach the location of the member and not for his publicity. It was presumed that the clients will avail the services of a professional by considering the experience, credibility, integrity and capability. This basic theme was very critical as the attestation services were considered the need of the society at large.

edge on various peers, the services of chartered accountants are being availed by many sectors in India as well as abroad both in private- and public-sector companies as well as in the administration of the Central and state Governments. These sectors not only look forward to their expertise in attestation services, but utilise the overall capability of the chartered accountants.

since the setting up of the Institute more than 60 years ago, till date about 165,000 candidates have qualified as chartered accountants. Nearly 50 per cent thereof are in service and a significant number thereof have occupied eminent positions in their respective organisations such as chairperson at regulatory bodies, chairperson of banks and insurance companies, members of ITAT, etc.

The remaining about 50 per cent members are in full time practice. because of their expertise, they not only render attestation services but have engaged themselves in other areas such as providing services in the field of Accounting, Taxation, Company Law matters, Financial Consultancy, Corporate Governance, Due Diligence, Transfer pricing and various other areas.

Need for Attestation Services With the rapid economic development in the country in the last 63 years, large sums are being spent on its developmental projects both in private as well as in public sector and therefore so far as economic activities are concerned they have increased manifold. billions are being spent every year by the Central Government, the state Governments and municipal corporations, panchayats, etc., on various developmental projects and on providing civic amenities as well as on the administration. private sector in the country has also grown tremendously.

Indian industrialists are expanding throughout the world.

India produces 900,000 engineers annually and the total number of CAs has reached only to about 165,000 over a period of 61 years. For any project where the services of engineers are required, there must be a need for the services of a chartered accountant, although not be in same ratio/framework. Where there is expenditure whether revenue as capital, there is a need of the services of the chartered accountant to check the transaction to control any misuse or misappropriation of funds. Thus, both in the private as well as in the public sector there are ample opportunities for work for CAs. And if entire spectrum of financial transactions in the country is brought under the ambit of audit, it is for sure that the current strength of CAs will be far insufficient to carry out just the attestation services.

Attestation Services: Serving the Society

At the time of setting up of the ICAI, it was thought beyond doubt that the attestation services shall be carried out and treated as profession and not as a business. Therefore, there was no scope for advertisement, etc., for attestation services. Even the size of name board was kept to a limited size just to reach the location of the members and not for their publicity. It was presumed that the clients will avail the services of a professional by considering the experience, credibility, integrity and capability. This basic theme was very critical as the attestation services were considered the need of the society at large. Just like the code of conduct of medical profession doesn’t allow a doctor to carry on his profession like a business, CAs are expected to follow the dignity of their profession to the society.

Let’s understand the criticality of distinction between profession and

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business at this stage. The basic motive behind profession is to provide service to the society while maintaining complete integrity and trust and, thus, while the professional will charge for the service, the motive will not be to earn abnormal profits. On the other hand, a business focuses primarily on making profits and while it may be servicing society indirectly, that’s not the primary objective of a businessman. For instance, due to his profession, a doctor is expected to treat the patient with right medicine and not refer medicines purely for making money from the pharma company. similarly, when a bank relies upon audited financial statements for lending to a company, its social money at the bank which is at stake. If CAs consider this as a way of making money from any given opportunity, they will be tempted to sign wrong certificates which will help the company mislead the bank. Thus, CAs should strictly maintain the dignity and high standards in the profession to maintain social respect.

No Compromise in Attestation FunctionThe society at large is relying on the attestation services for ensuring that

the public funds are utilised properly. In case where scams are discovered and millions of dollars gets into wrong hands, we should realise that either there were no attestation services utilized or, if they were, there were lapses. In such cases, the society starts to feel that the chartered accountants are not performing their duties which negate the entire purpose of having an independent eye. It is very important for the entire profession to ensure that the quality of attestation is so high that any stakeholder should be able to completely rely on the same without a doubt. This will ensure that the public as well as private finances are utilized in the manner they are supposed to. There is a strict need for the chartered accountants to follow Code of Ethics in letter and spirit for everlasting reliability of the profession and continued trust of society at large.

Due to the environment of intense competition, there may be situations in which few members may find it difficult to earn in proportion to their skills and hardwork. In such situations, some of the members may get ready to take up an assignment at a lower remuneration which may not justify the time/skills required to perform the same. This may result in compromise of quality on that assignment, which is completely unacceptable for the sake of profession.

The concentration of work with larger firms may be one of the reasons for smaller firms/individual practitioner not getting allocated sufficient work / value for their work. While the large firms are welcome for the infrastructure they introduce in the system, we must not ignore the fact that the attestation services is all about individual responsibility and an individual practitioner can perform the same with same (or better) quality.

We all must ensure that the quality levels are not compromised upon and thus society should be able to respect

all CAs for their skills, quality and integrity.

Ensuring Quality of Attestation Services We as professional members need to brainstorm as to how to ensure an environment that none of the members is ready to compromise on the quality.

As a backgrounder, the primary object of establishment of our Institute as an autonomous body through an Act of parliament 61 years ago was to regulate the accountancy profession in India and thereby to mean to have a proper check on its members to ensure that various attestation services which are being rendered suit the needs of the society. To achieve this object a disciplinary committee is effectively working in the Institute takes disciplinary actions against errant members.

Need to Put More Emphasis on Attestation Services Coming back to the basic question of why are the members diversifying to other areas from the core attestation services. As we discussed above, many members feel that the overall pie of the assignments available in the economy are not sufficient and some members do not get sufficient work. This induces them to other practice areas.

While the Institute has been trying to help the members in developing other practice areas, it is equally important to note that the basic area of operation or dominance for CAs is the attestation services. Thus, we should do our best to ensure that a significant section of economic activities in the country move under the ambit of independent attestation services and the entire work is distributed evenly among the members at large and not concentrated with few players.

sometimes, it is noticed at the study circles, that the value addition for CAs gets limited to understanding the

While the Institute has been trying to help the members in

developing other practice areas, it is equally important to note that the basic area of operation or dominance for CAs is the attestation services. Thus, we should do our best to ensure that a significant section of economic activities in the country move under the ambit of independent attestation services and the entire work is distributed evenly among the members at large and not concentrated with few players.

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equitable manner – There should be a mechanism whereby as far as the entire audit assignments available in the country be allotted to the maximum number of chartered accountants in practice in a justifiable manner based on the skills, knowledge, experience, integrity, credibility of the members and not on infrastructure and size only. It is for this reason that a ceiling has been fixed as to the number of audits a firm can audit under the provisions of the Companies Act, 1956.

(6) by putting more stress on moral and ethical standards for CAs – Framing number of Accounting standards or enforcing stringent Rules and Regulations alone would not serve the desired purpose unless the principles of high moral values are adopted to ensure integrity of our members.

(7) by ensuring that the profession is not deviating from the path originally thought.

What Practicing Members can Contribute (1) Ensure that attestation is a

profession of service to the Society: practicing members should know that this is a

profession of service to the society where service is first and profit is secondary motto. Keeping this in mind, they should render their services.

(2) Ensure high moral character, ethical standards and integrity: While rendering attestation services, members must ensure high moral character, ethical standard and integrity that alone can bring good results.

(3) Do not try to snatch the work of others: Without communicating the previous member, no member should accept any attestation work.

(4) Render the services without favour and fear: While rendering services CAs’ report thereon should be without favour and fear so as to ensure the public confidence.

(5) Proper utilisation of your experience, knowledge and skill: While working on attestation services, CAs should utilise their full skills, knowledge and experience.

ConclusionThe need of the hour is to ensure that the credibility of attestation services is retained and to ensure that all financial transactions taking place in the Government sector as well as all transactions of private sector in which public funds are involved are brought under the ambit of audit by an independent auditor who should be a practicing member of ICAI.

If all the financial transactions are audited properly no scam can take place in the country. Corruption shall also be eliminated, altogether and if corruption is eliminated, India can become one of the most advanced countries in the world. ICAI and its members can play a significant role in the elimination of corruption and, at the same time, through proper utilisation of funds, we can improve the conditions of our citizens.n

If all the financial transactions are audited properly

no scam can take place in the country. Corruption shall also be eliminated altogether and if corruption is eliminated India can become one of the advanced countries in the world. ICAI and its members can play a significant role in the elimination of corruption and at the same time through proper utilisation of funds we can improve the conditions of our citizens.

technology for filing TDs returns and VAT. While members of the Institute are willing to take up additional activities, let’s not ignore the fact that this is not our core area of competence and we have a much larger canvas to work and serve the society.

The Institute is taking active steps to ensure that there are ample new opportunities for members to take up attestation services and that there are set processes to ensure proper distribution of the same among all members with healthy competition. Further, there is a need to more strictly ensure the quality of deliverables from members, meeting the highest norms and conforming to related standards. This fact should be communicated to the stakeholders at large to re-build the credibility which was somewhat lost after the satyam episode. It’s an ongoing process where dialogues need to undergo between the Government and the Institute, and the Institute and various stakeholders.

Enhancing the Value of Attestation ServicesThe value of attestation services can be enhanced in the following ways:(1) by putting more emphasis on

attestation services as the area of core competence for CAs – Diversification to other areas of professional expertise can be accorded a second priority and other services can be treated as incidental.

(2) by expediting disciplinary actions against errant members.

(3) by educating stakeholders about the importance of getting their accounts audited

(4) by giving more importance to individual’s knowledge, skills, experience, integrity and credibility instead of the size of the firm and infrastructure.

(5) by ensuring allocation of attestation work in a justifiable and

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Internal Audit ManualInternal Audit plays a crucial role in an organisation’s corporate governance, internal control structures, risk management analysis and financial reporting process. In the present complex business scenario, the internal audit function has assumed all the more importance. In this article, the author presents an Internal Audit Manual that summarizes the operations of the internal audit function at a company and delineates the policies, standards, and procedures which will generally govern the internal audit function. Notwithstanding the foregoing, these policies, standards, and procedures may not be followed for certain special projects requested by the Audit Committee of the Board of Directors and/or the Managing Director , fraud or financial irregularity audits, and under other special circumstances. Read on to know more.

Reporting Structure Chief Internal Auditor reports functionally to the Audit Committee and administratively to the managing Director and Directors.

Job Description In discharging his job respon-sibilities, the Chief Internal Auditor will: • Develop, document, implement,

test,andmaintainacomprehensiveinternal audit plan and system of internal controls to help provide assurance that applicable rules,regulations, and group policiesand procedures are complied with judiciously;

• Examine financial transactions foraccuracy and compliance with group policies and applicable rules and regulations;

• Evaluate financialandoperationalprocedures to assure adequate internal controls are present;

• Identify, assess, and evaluatethe group’s risk areas; make appropriate recommendations for improved internal controls and accounting procedures; and research and adopt industry best practices where appropriate;

• Work with the Managing Directorand senior officers of the group to identify key business risks,assess those risks, and establishrisk management procedures and practices based on industry best practices;

• Identifypertinentandbestpracticesemerging within the industry which can assist the company in producing accurate and reliable financial reporting information;

• Advise the Group’s seniormanagement on policy and procedure developments with respecttotaxissues;

• Provide expert knowledge withrespect to maintaining the group’s quality status;

• Monitor current tax lawdevelopments which could potentially adversely impact the group’s operations;

• Oversee External Auditors auditsand inquiries;

• Preparenecessary reports for theAudit Committee of the board of Directors;

• Research and respond to taxcompliance and internal audit inquiries from the board of Directors, the Managing Director,

CA. Surender Pal Bagaria(The author is a member of the Institute. He can be reached at [email protected])

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and other members of the board and

• Complete other projects andperform other duties as assigned by the managing Director

Overview of Internal Audit Function (A) Scope of Internal Audits: The internal audit function’s scope of operations is by its very nature quite expansive. The internal auditfunction assists theGroup in fulfillingitsvision,mission,strategic initiatives,and objectives, while adhering to itscorevalues,bybringingasystematic,disciplined approach to evaluate and improve the effectiveness of enterprise-wideriskmanagement,internalcontrolsystems,andgovernanceprocesses.Ultimately,theinternalauditfunction

helps ensure: • Risks are appropriately identified

and managed. • Significant financial, managerial,

and operating information is accurate,reliable,andtimely.

• Groupresourcesareusedefficientlyand adequately safeguarded.

• Groupoperationsaretransactedinaccordance with sufficient internal controls,goodbusinessjudgment,and high ethical standards.

• Quality and continuousimprovement are fostered in the Group’s internal controlprocesses. Opportunities for improving the

Group’s internal controls may beidentified during internal audits; these opportunities will be communicated to the Audit Committee of the board of Directors and the managing Director (B) Types of Audits:In preparing the Annual Internal Audit Plan, the Chief Internal Auditorshall determine the type of audit to be performed for each auditee. The following is a summary of the various types of audits which will generally be conducted:

The internal audit function’s scope of operations is by its

very nature quite expansive. The internal audit function assists the Group in fulfilling its vision, mission, strategic initiatives, and objectives, while adhering to its core values, by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of enterprise-wide risk management, internal control systems, and governance processes.

(1) Departmental Audits: Departmental audits are designed to review and evaluate the activities and operations of a particular departmental function, activity,department, or unit under review.Departmental audits will evaluate accounting controls, ensurecompliance with company policies and procedures, applicable rulesand regulations, and validate therecords and account balances of the auditee. Departmental audits may utilise a complete battery of audit tests and procedures,including, but not limited to,functional tests, transactionreviews, substantive tests, andanalytical reviews.

(2) Financial Audits: Financial audits are designed to validate the accuracy and completeness of records and account balances. Financial audits may utilise substantivetests,analyticalreviews,and other validation procedures which may or may not include functional tests or transaction reviews. Financial audits determine whether the financial information of the company function, activity,department, or unit under auditfairly represents the financial position, results of operations,and cash flows or changes in

financial position of the auditee in accordance with GenerallyAccepted Accounting principles.

(3) Operational Audits: Operational audits are designed to evaluate procedures and controls which impact the attainment of the company’s organisational goals and objectives. Operational audits also measure compliance with Grouppolicies and procedures as well as applicable rules and regulations. Duringoperationalaudits,functionaltests and transaction reviews may be utilised.

(4) Fraud and Financial Irregularity Audits: Fraud and financial irregularity audits are designed to verify the existence andmagnitude of suspected fraud and financial irregularities. Fraud and financial irregularity audits may be conducted at the request of the Audit Committee of the board of Directors,theManagingDirector;asa result of a tip; or at the discretion of the Chief Internal Auditor. The Chief Internal Auditor shall utilise the highest level of discretion when undertaking a fraud or financial irregularity audit. The Chief Internal Auditor shall promptly notify the Managing Director, which maybe appropriate, of any significantfindings which result from a fraud or financial irregularity audit.

(5) Follow-up Audits: Follow-up audits are designed to determine whether corrective action has been taken on previous audit recommendations. These audits may be conducted three months after a Final Audit Report was issued and usually include only the deficiencies reported in the Final Audit Report. The follow-up audit may include such functional or substantive tests that are necessary to verify that logical and appropriate corrective actions have been taken.

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(C) The Phased Audit Approach A phased audit approach will generally used to conduct, monitor, andcomplete internal audits in a timely and professional manner. Notwithstanding the foregoing, this approachmaynotbe followed for certain special projects requested by the managing Director.

This phased audit approach allows the Chief Internal Auditor to: • Establishguidelinesforcompleting

internal audits; • Identify the entire internal audit

process, rather than emphasizingthe fieldwork component as the extent of the internal auditprocess;

• Establish responsibilities andoutputs for each phase of the internal audit process; and

• Provide regular communicationthat serves to document the internal audit progress. Asdiscussedbelowinmoredetail,

the phased audit approach consists of five phases: • Theplanningphase;• Theorganizingphase;• Thepreliminaryphase;• Theconductingphase;and• Thereportingphase.

Each phase of the internal audit process has definite requirements and produces specific deliverables.(D) Internal Audit Procedures and Techniques During the internal audit process, theChief Internal Auditor may employ one or more audit techniques. such techniquesinclude,butarenotlimitedto: (1) Observation and Inquiry: The

Chief Internal Auditor may observe the operation of any function,activity, department, or unit. TheAuditor may also make reasonable inquiriesofanyGroupemployeeinattempting to carry out the internal audit process.

(2) Analysis and Review: A principal means by which the Auditor administers the company’s internal audit function is through careful analysis and critical review of both financial and operating data. In some cases this will be accomplished through the comparison of current balances with those from prior periods. Another common technique which may be utilized while performinganalysis and review activities is the breakdown of individual accounts into their most refined detail so that unusual or significant items are more likely to be highlighted and thus selected for further review. Other techniques may be used as necessary to accomplish an appropriate level of analytical review during the internal audit process.

(3) Inspection: At his discretion, theAuditor shall have the authority to inspect physical assets,documents, and other evidencesupporting relevant data of the auditee under review. This process is usually accomplished by verification of transactions employing the basic audit techniques,whichare:

•Vouching—Thisistheverificationofentries by comparing them to the original documents on which they are based. This technique helps ensuretheaccuracy,genuineness,validity,ortruthoftheentriesunderreview.

• Recomputation—This is theprocess of recalculating selected calculations to determine their accuracy. In applying this technique an auditee’s footings, addingmachinetapes,andspreadsheetsshall never be assumed to be correct.

• Retracing of BookkeepingProcedures—Thisincludestracingpostings from original books of entry to ledgers and vice-versa.

•PhysicalExaminationandCount—This technique may be used to substantiate the reliability of the records under examination. Inapplyingthistechnique,theAuditorshall:(i) identify what is being

examined;(ii) determinetheexistenceof the

itemsbeingexamined;(iii) determine the condition of the

itemsbeingexamined;and(iv) verify the quantity of the items

beingexamined.(4) Confirming: The validity of items

shown on company records may be established by receiving confirmation directly from a third-party in a position to verify the validity of a given item.

(5) Scanning: This is the process of quickly but carefully scrutinising a ledger account, document, oranyotherrecordforquestionable,unusual, or improper items.scanning will be used in the internal audit process whenever it is determined that this process has a reasonable chance of adding value.

(E) Internal Control Internal control is a process which is

The first step in the planning phase is the development of the

initial audit objectives which are as precise as possible and clearly articulate what the audit is expected to accomplish. The audit objectives will define the audit purpose, establish the direction for detailed audit work, and provide the focus for formulating subsequent findings. All planning, evidence gathering, and data evaluation begins with the audit objectives, and the audit ends when the Auditor has enough competent and relevant evidence to write a report which satisfies the audit objectives.

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• Information and Communi-cation—pertinent information must be identified, captured,and communicated in a form and time-frame that enables people to effectively carry out their responsibilities. Information systems produce reports containing operational,financial, and compliance-relatedinformation that makes it possible tomanageandcontroltheGroup’soperations.

• Monitoring—Internal control systems need to be monitored; this means that over time Groupmanagement must assess the quality of the internal control system’s performance.

When is internal control effective? A system of internal control can be judgedeffectiveifGroupmanagementhas reasonable assurance that it understandstheextenttowhich:• TheGroup’soperationalobjectives

and goals are being achieved; • TheGroup’sfinancial,managerial,

and operational information is accurate,reliable,andtimely;

The Planning Phase The planning phase begins when the Chief Internal Auditor begins an internal audit engagement. During this phase,auditobjectivesandscopearedeveloped,andappropriateOfficerofCompany is notified of the planned audit. The deliverables of the planning phase include the initial audit objectives and notification of appropriate Officers of Company. A. Phase Objectives and Procedures (1) Phase Objectives • The planning phase will develop

the initial audit objectives and the requisite audit methodology to satisfy those objectives.

• Appropriate members ofmanagement will be notified that

theirfunction,activity,department,or unit has been selected for audit.

(2) Phase Procedures • TheAuditorwilldevelop the initial

audit objectives with consideration for any concerns expressedby the Audit Committee of the Board, the Managing Director,and other relevant members of management.

• TheAuditorwill notify the auditeeof the pending audit in a timely manner.

B. Development of Audit Objectives The first step in the planning phase is the development of the initial audit objectives which are as precise as possible and clearly articulate what the audit is expected to accomplish.The audit objectives will define the audit purpose, establish the directionfor detailed audit work, and providethe focus for formulating subsequent findings. All planning, evidencegathering,anddataevaluationbeginswiththeauditobjectives,andtheauditends when the Auditor has enough competent and relevant evidence to write a report which satisfies the audit objectives. C. Auditee Notification After the initial audit objectives are

The conducting phase of the audit begins with the finalisation

of the audit programme and ends with the discussion with the officers of the unit. The extent of the tests performed during this phase is heavily dependent upon the discretion and judgment of the Auditor. The materiality of the amounts involved and the relative risk of the existence of errors or other irregularities will be weighed heavily when considering and planning audit tests.

ultimately implemented by company management; it is designed to provide reasonable assurances regarding the achievement of company objectives in the following categories: • Operations— relating to effective

and efficient use of AbC Company resources;

• Financial Reporting— relating tothe preparation of reliable financial statements; and

• Compliance—relatingtoCompanycompliance with applicable rules,regulations,andpolicies.

Internal control consists of five interrelated components which are as follows:• Control Environment—These

factors include the integrity,ethical values, and competenceof company personnel; management’s philosophy and operating style; the manner in which company management assigns authority and responsibility; and the attention and direction provided by company management.

• Risk Assessment— A prerequisite to risk assessment is the establishment of objectives which are internally consistent. Risk assessment is the identification,analysis, and management ofrelevant risks which may impede the attainment of the AbC Company’s goals and objectives.

• Control Activities—These are the policies and procedures which help ensure management directives are carried out. Control activities help ensure that necessary actions are taken to address risks which may impede the attainment of the company’s goals and objectives. Ultimately, controlactivities include a broad range of activitiesincluding,butnot limitedto approvals, authorisations,verifications, reconciliations,reviewsofoperatingperformance,and segregation of duties.

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developed by the Auditor, the nextstep in the planning phase is to notify the auditee of the audit, except incircumstances where fraud and/or irregularities may be suspected.

In notifying the auditee of a pending audit, the Auditor willgenerally communicate the following information: • The activity name or a brief

descriptionofthefunction,activity,department,orunitoftheCompanyto be audited;

• Thetypeofaudittobeconductedand the audit objectives and scope;

• Thedatesoftheplannedaudit;• A request of any required

documentation; D. Phase Conclusion The planning phase will conclude the Auditor’s notification of the auditee of the pending audit.

The Organising PhaseThe organising phase begins when the audit notification letter is issued and ends when the Opening discussion is held.During the organising phase,the Auditor organises the audit and preparesdetailedauditplans.Moreover,during this phase the Auditor will develop a preliminary audit program,prepare any necessary administrative documentation, prepare an agendafor the discussion, and conduct thediscussion where appropriate.

This phase includes the process of the Auditor identifying the various types of information and documentation needed from the auditee. This information and documentation will generally include items such as: organizationalcharts,jobdescriptions,department manuals, and relevantreports. A. Phase Objectives and Procedures (1) Phase Objectives: During the

organising phase the Auditor will develop the preliminary audit program and conduct the discussion,whereappropriate.

(2) Phase Procedures: During the organising phase the auditor will review appropriate data and request copies of pertinent information. Commonexamplesofdatawhichwill likely be requested include: 1. Accounting information not

available from the Company’s accounting system;

2. pertinent contracts and agreements;

3. Established policies,procedures, and accountingprocesses;

4. minutes of pertinent senior management meetings; and

5. pertinent correspondence and other relevant information.

• During the organizing phase theAuditor will obtain a copy of the appropriate organizational chartand confirm its accuracy during the discussion, if applicable. Ifthere is no organisational chart of the function, activity, department,or unit of the company under review, the auditor may facilitatethe development of one.

• During the organising phase anagenda for the discussion will be prepared, and the discussionwillbe scheduled and conducted,where appropriate.

• Themajoroutputof thisphase isthe preliminary audit program.

B. Preliminary Audit Programme The Auditor will develop the preliminary audit program during the organizingphaseandthereaftermakemodifications as necessary. C. Opening Discussion ThepurposeoftheOpeningDiscussion,where applicable, is to discuss theplans for the overall conduct of the audit.DuringtheOpeningdiscussion,ifapplicable,theAuditorwill:• Explain the type of audit being

undertaken, the scope of theplannedaudit,theauditobjectives,theperiod tobeaudited,and thegeneral approach to the audit;

•Verifythattheauditeeunderstandsthe role of the Auditor and the commitment needed from the auditee to support the audit and respond to audit requests;

• Ask the appropriate Officers ofmanagement if they have any particular areas of risk or concern which they would like reviewed;

• Request management plans,objectives, or other documentsthat may have a material impact on the audit outcome;

• Reviewauditfindingsfrompreviousinternalaudits,ifapplicable;

• Develop a list of key personnelin the auditee department to be contacted for meetings or information;

• Discuss the procedure forpreparing and reviewing the formal auditreport,whichisacompilationof reportable findings and auditee responses;

• InquireaboutcurrentdevelopmentsrelatingtotheCompanyfunction,activity,department,orunit underaudit;

•Confirmthelocationofdocumentsand records needed during the audit;

• Explain the preliminary auditprogram in general terms and establish priorities for the audit;

• Prepareaworkpapermemowhich

In the performance of audit work, the Standards for the

Professional Practice of Internal Auditing state that “Internal auditors should collect, analyse, interpret, and document information to support audit results.” The Auditor’s work papers will provide the principal evidence that these standards were met, and the audit was performed professionally.

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summarizesthedate,time,location,and persons in attendance at the Openingdiscussion,ifapplicable;and

• Discuss any other applicabletopics.

D. Phase Conclusion This phase will be concluded upon the closeof thediscussion, if applicable.Audit work will not begin, nor willmeetings with the auditee be held,until the preliminary audit program has been prepared, the auditee hasbeen properly advised of the planned audit, and the discussion has beenheld, if applicable. Notwithstandingthe foregoing, these proceduresmaynot be followed in cases of suspected financial irregularities, fraud, or otherspecial circumstances.

The Preliminary PhaseThe preliminary phase begins upon the conclusion of the discussion,if applicable, and ends with thepreparation of the audit programme.A. Phase Objectives and Proce-dures (1) Phase Objectives • The objective of the preliminary

phase is to gain a basic understanding of the company function,activity,departmentorunitwhichisunderaudit,includingtheaccountsavailable for itsuse, thetypes and volumes of transactions processed, and the systems andprocesses used in its operations.

• The preliminary phase will allowthe Auditor to develop a clear understanding of the events and practices which may have a significant impact on the operation oftheCompanyfunction,activity,department,orunitunderaudit.

• The preliminary phase ultimatelyallows the Auditor to obtain a broad overview of the internal controls in place in the Company function,activity,department,orunitwhichis under audit. The preliminary

phase also allows the Auditor to identify any areas of the auditee’s operations which may require special attention or consideration.

(2) Phase Procedures During the preliminary phase the Auditor will: • Reviewcorrespondencefiles,prior

work papers (if applicable), andother relevant information;

• Identify significant changes inaccount balances over time or large variances from expectationor budget and perform an analytical review to determine the significance of these variances;

• Review organisational charts andjob descriptions and the nature of the auditee’s activities and functions;

• Evaluate the auditee’s internalcontrols;

• Discuss relevantmatters with theauditee;

• Inquireaboutproblemareaswhichthe auditee would like the Auditor to review;

• Make arrangements with theauditee for the preparation of the data which will be needed during the audit; and

• Develop preliminary estimates ofmateriality levels and acceptable error rates.

B. Phase Conclusion This phase concludes with the preparation of the audit programme.

The Conducting PhaseThe conducting phase of the audit begins with the finalisation of the audit programme and ends with the discussion with the officers of the unit.Theextentofthetestsperformedduring this phase is heavily dependent upon the discretion and judgment of the Auditor. The materiality of the amounts involved and the relative riskof theexistenceoferrorsorotherirregularities will be weighed heavily

when considering and planning audit tests. A. Phase Objectives and Procedures (1) Phase Objectives During the conducting phase the Auditor will: • Executetheauditprogram;• Prepare audit work papers which

detail the necessary audit work accomplished to satisfy each step of the audit program;

• PrepareaDraftFinalAuditReport;• Obtain management responses

to preliminary findings, whereappropriate; and

• HoldtheClosingdiscussion.(2) Phase Procedures procedures utilised for the accomplishment of the audit program will vary based on the scope and objectives of the audit. some procedures that will regularly be employed during this phase include a review of internal controls and the tracing of transactions through the companyfunction,activity,department,or unit under audit. B. Preliminary Audit Findings preliminary audit findings are written statements of conditions noted during the audit. (1) Types of Findings: Deficiencies

and findings noted during the audit will be classified as reportable

The Auditor will prepare a Draft Final Audit Report prior to

the Closing Discussion. The Draft Final Audit Report may include (among others) sections dealing with the background, scope, audit objectives, audit findings, and recommendations. At the Closing discussion, the Auditor will request a formal response to all reportable findings from management. Management will be requested to respond in a timely manner.

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or non-reportable. Reportable findings will be included in the Final Audit Report. Non-reportable findings will not be included in the Final Audit Report, but maybe discussed briefly during the Closing discussion. It is important to note that the category of any deficiency or finding may change as additional information becomes available.

(2) Processing of Findings: If deficiencies are identified during the audit, they will be discussedwith the auditee to verify the facts before any audit reports are drafted. If these discussions confirm that a deficiency exists, the Auditorwill draft a preliminary finding. All findings will be considered preliminary unless (and until) they are included in the Final Audit Report.

C. The Closing Conference The Closing discussion of each audit will be scheduled as close as practical tothelastdayoffieldwork;i.e.,thelastday of the conducting phase. During the Closing discussion the Auditor will present his preliminary findings to the auditee,andhewillseektheauditee’sinput where appropriate. D. Phase Conclusion This phase will conclude upon conclusion of the Closing discussion.

The Reporting PhaseThe reporting phase begins upon completion of the Closing discussion and ends when the Final Audit Report is issued. The activities completed during this phase include preparing a Draft Audit Report; discussing proposed changes with the appropriate level of management; preparing a Final Audit Report; and distributing the Final Audit Report to the Audit Committee of the Board, the Managing Director,and other appropriate staff of senior management and/or department management.

Internal Audit Work PapersIn theperformanceofauditwork, thestandards for the professional practice of Internal Auditing state that “Internal auditors should collect, analyse,interpret, and document informationto support audit results.” The Auditor’s work papers will provide the principal evidence that these standards were met, and the audit was performedprofessionally. The term “work papers” includes all documents and papers collected or prepared during a given audit.Work papers provide thebasis and support for the conclusions reached by the Auditor. All relevant work papers prepared during a review will be preserved and included in the work paper files maintained by the Auditor. A. Characteristics of Work Papers Work papers include the evidentialmatter that links fieldwork and the Final AuditReport.Workpaperswillcontainthe necessary evidence to support the findings, judgments, and conclusionsin the Final Audit Report. (1) Sufficiency: Work papers will

alwaysbecompleteandaccurate,and include adequate data to precisely indicate the audit work performed.Work papers will alsoprovide support for findings,judgments, and the conclusionsreached by the Auditor as a result

oftheinternalauditprocess.Workpapers will delineate sufficient data so that the Audit Committee of the board of Directors can easily verify that: • Theauditassignmenthasbeen

properly planned; • Theauditee’ssystemofinternal

control has been reviewed and evaluated in determining the extent of the audit testsundertaken; and

• Appropriate audit tests wereperformed,andtheappropriateauditing procedures were followed.

(2) Competency: Work papers willinclude only high quality information and evidence. Accordingly, theAuditor will take all necessary steps to help ensure that the information contained therein is reliable.

(3) Relevance: The information contained in the work papers will be restricted to matters that are materially important and relevant to the audit objectives.

(4) Clarity and Understandability: Workpaperswillbeunderstandablewithout detailed supplementary oralexplanations.Workpaperswillalso be complete and concise.

(5) Principles of Documentation: Work papers will substantiateeverything included in the Final Audit Report. Work papers willclearly identify the documents or series of documents examined.It is not necessary to include a copyofeachdocumentexamined,althoughinsomecases,efficiencymay result by utilizing copies ofdocuments.

B. Indexing and Cross-Referencing Work Papers The Auditor may use a standard numberingandindexingsystemforallwork papers; it is specifically noted that thisstandardnumberingandindexingsystem may change from time to time.

There are three phases in the fraud programme:

prevention, detection, and investigation. The Auditor and the Company’s operating management are responsible for recognising the exposures, control weaknesses, and situations which foster fraudulent activity. The Auditor may learn of known or suspected fraudulent activities from many sources, including routine audits.

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C. Standards for Work Papers All work papers prepared by the Auditor shall be prepared in good form with proper attention to layout, design,and legibility,withcompleteheadings,explanationsofsources,andverificationof work performed. The Auditor will generally observe the following rules when preparing work papers: • Everyworkpaperwillbeproperly

identified. The work paper heading may include the name of the auditee, a description of theinformation presented, and theperiod covered or applicable date.

• Workpapersmaybelinkedtotheaudit program.

• Thesourceof thedatapresentedon each work paper will be clearly stated so as to leave no doubt as to the source of the information.

• The nature of verification workperformed by the Auditor will be indicated on each work paper.

• Wheneversymbolsareemployed,they will be accompanied by a legend explaining theirsignificance.

D. Audit Evidence The Auditor generally gathers evidence frominternalsources,whichmayrequireverification from external sources.some of the internal sources of audit evidence include books of account,ledgers and records, memoranda,minutesofmeetings, documents thatsupporttransactions,andmanagementletters. Information gathered from these sourcesmaybeverifiedfromexternalsources that include confirmations of bank balances, accounts receivable,investment balances, asset held bythird-parties,long-termdebt,andotherassets and liabilities.

All of the information gathered to supporttheinternalauditeffort,andtheconclusions drawn therefrom, shouldbe considered audit evidence which may be categorised as analytical,documentary,physical,ortestimonial.(1) Analytical Evidence: Analytical

evidence includes computations,comparisons, reasoning, andthe separation of information into components.

(2) Documentary Evidence: Documentary evidence consists of letters, contracts, accountingrecords,invoices,etc.

(3) Physical Evidence: physical evidence is obtained by direct inspection or observation of (1) activities, (2) property, or (3)events. It may take the form of memoranda,photographs,charts,or other summary documentation which recapitulates the subject matter of the inspection.

(4) Testimonial Evidence: Testimonial evidence is obtained from others through statements received in response to inquiries or through interviews. The statements critical to the audit will be corroborated through independent verification when feasible.

Audit CommunicationsThe Final Audit Report is designed to assist management in measuring its own performance, particularly withrespect to the reliability of established internal controls. A. General Standards of Report Writing • Findings, recommendations,

and opinions will be expressedobjectively.

• Final Audit Reports will beorganized so as to clearly andconciselydiscloserelevant,timely,and important information that can be used to enhance or improve relevant aspects of the Unit operations.

• Findings, recommendations, andcomments will contain all relevant information necessary for the auditee to fully understand the reported conditions. All Final Audit reports will present factual matters accurately and completely.

• TheFinalAuditReportwill identifythe most significant conditions requiring management’s attention.

B. Final Audit Reports Report Preparation Procedures and Content: The Auditor will prepare a Draft Final Audit Report prior to the Closing Discussion. The Draft Final Audit Report may include (among others) sections dealing with the background, scope, audit objectives,auditfindings,andrecommendations.At theClosingdiscussion, theAuditorwill request a formal response to all reportable findings from management. management will be requested to respond in a timely manner.

After reviewing management’s responses to the Draft Final Audit Report, the Auditor shall make anychanges he deems necessary. After processing any necessary changes,a Final Audit Report will be distributed to theAuditCommitteeof theBoard,the Managing Director, and othermembers of senior management and/or department management that may be appropriate.

because of the many and varied activities at the Company, and thevarious reporting relationships, theaddressees and distribution list of each Final Audit Report will be determined on a case-by-case basis. All Draft Final Audit Reports and Final Audit Reports shallbedeemed“confidential,”andtheAuditor shall take appropriate measures to ensure their limited distribution to those individuals with a legitimate business need for possessing the information contained therein.

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Purpose of Samplingsampling will be used by the Auditor. samples are portions of a population that are used to represent the population. samples are very useful in obtaining information about a population. There are many types of samples; however, samples can begrouped into two main categories,judgmental samples and statistical samples. A. Judgmental SamplingJudgmental sampling may be used to select examples of deficienciesto support a hypothesis that a given system of internal controls is weak. Judgmental sampling will in some cases be used to provide the Auditor with clues as to whether to proceed with a statistical sample. If the Auditor encounters a well-designed and well-executedinternalcontrolsystem,goodmanagement,well-trainedemployees,and a feedback mechanism that highlightserrors,itmaybeunnecessaryto spend a great deal of time performing extensive transaction tests. A smallsample selected at random to obtain some reasonable representation of the population may suffice. If no errors arefound,theAuditormayreasonablydetermine that he sees no basis for examiningthepopulationfurtherorforsuspecting any material error. B. Statistical SamplingThe main advantages of statistical (probability) sampling over judgmental sampling are based on the fact that there is a significant body of accepted theorytosupportandexplainstatisticalsampling. One of the attractive aspects of probability sampling is that it is possible to measure the reliability of the estimates computed from the sample results. The ability to measure reliability furnishes additional desirable features for statistical sampling. There are several types of statistical sampling. (1) Random Number Sampling:

Random number sampling is generally considered the most

likely to result in a random sample. It makes use of a computerizedrandom number generator to select items to be sampled.

(2) Interval Sampling: Interval sampling simply means selecting items at intervals. When usingintervalsampling,everyitemmusthave an equal chance of being selected. Interval sampling is particularly useful when the records are inmanual form, the itemsareunnumbered, or the populationcontains some items that are not applicable to the audit purpose.

(3) Stratified Sampling: In stratified sampling the Auditor will separate the population into two or more strata; i.e., separate populations,and then takes samples from each. Typically significant or expensiveitems will be set aside in one stratumforcompleteexamination,and sampling will generally be used for the remaining strata. In every population, the Auditor will lookforwidevariationsinsize,amount,and characteristics of the items making up the population. Whensuchwidevariationsarefound,theAuditor will consider stratification. stratified sampling arranges the population so as to provide greater samplingefficiency.Properlyused,stratified sampling will result in a smaller variance within a given sample size than simple randomsampling.

(4) Cluster Sampling: Whendocuments and records are so scattered or dispersed that it is too time consuming and costly to use simple random number sampling, the Auditor may usethe technique of cluster sampling. Cluster sampling is what the name implies; clusters of items are selected at random, then theclusters are either examined intheir entirety or are themselves sampled. Clusters may be based

on natural separations; e.g., alldocuments in a file cabinet drawer may be examined. Clusters mayalso be artificial.

(5) Dollar Unit Sampling: The dollar unit sampling technique selects records according to monetary units rather than physical attributes. The advantages of dollar unit sampling aresmallersamplesizes,analmostinfinite degree of stratification and the greatly increased likelihood of finding large but infrequent errors.

(6) The Sample Size: Sample sizescan be determined judgmentally or statistically. The decision will be made based on the audit objectives. In many audit situations a large audit sample or a statistically determined sample size is unnecessary. Where theAuditor has determined the system of internal control to be strong,it may be appropriate to sample only a few handpicked items to determine that the system is actually functioning properly. Assuming the system functions

as planned, it can then be declaredthat the system does indeed have the purportedcontrolpoints,andtheyarein fact working. If a particular system is found satisfactory from an internal control standpoint further sampling may not be necessary or appropriate.

Investigating Suspected Fraudulent ActivitiesThere are three phases in the fraud programme: prevention, detection,and investigation. The Auditor and the Company’s operating management are responsible for recognising the exposures, control weaknesses, andsituations which foster fraudulent activity. The Auditor may learn of known or suspected fraudulent activities from manysources,includingroutineaudits.Also,theAuditormaybecalleduponbytheAuditCommitteeoftheBoard,theManagingDirector,orothermembers

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of senior management to conduct investigations of known or suspected fraudulent activities. because of the sensitivity and the potential litigation exposure for the company, allinvestigations of known or suspected fraudulent activities shall be conducted carefully and thoroughly.

The purpose of these audit procedures is to establish a standardized methodology for theAuditor to follow when investigating,processing, and reporting findings ofknown or suspected misappropriation and similar irregularities. These procedures may be used in the investigation of fraudulent activities or financial irregularities at the Company. A. Objectives The objectives of investigations conducted by the Auditor are to determine whether the suspected irregularityoccurred,todetermineanddocument the source and amount of funds involved, to identify theindividuals responsible for the loss,and to provide recommendations for corrective actions to improve prevention and detection procedures. TheAuditor,andanyoneengaged

or acting on his behalf, is dulyauthorised without limitation by the Audit Committee of the board to: • Have free, full, unrestricted, and

unfettered access to all company functions, records, property,activities, manual and automatedsystems,andpersonnel.

• Have free, full, unrestricted, andunfettered access to all third-party

institutions, organisations, andindividuals who have business dealings with the company.

• Have free, full, unrestricted, andunfettered access to the Audit Committee of the board and the managing Director.

• Allocateresources,setfrequencies,selectsubjects,determinescopesof work, and apply appropriatetechniques required to accomplish the internal audit function’s objectives.

• Obtain the necessary assistanceof personnel in functions,departments, and/or units ofthe company where audits are performed, as well as otherspecializedservicesfromwithinoroutside the company.

B. Responsibilities The Auditor may consult and coordinate any investigation activities with the Audit CommitteeoftheBoard,theManagingDirector,andothermembersofseniormanagement,asappropriate.Inorderto avoid damaging the reputation of innocent persons suspected of wrongful conduct, and to protect thecompany from potential civil liability,the results of preliminary investigations by the Auditor will not be disclosed or discussed with anyone except theAudit Committee of the Board, theManagingDirector,orothermembersof senior management who have a legitimate need to know such results in order to perform their assigned duties and responsibilities. C. Definitions The subject of these procedures is known or suspected losses resulting from misappropriation or misuse of company assets entrusted to employees as part of their job responsibilities. The terms used throughout these procedures are: • Assets: Money, negotiable

securities, data and physicalpropertyof thecompany,whetherowned or leased.

• Conflict of Interest: Whencompanyresources,includingstafftime,funds,companyreputation,orotherassetsarediverted from,or made less effective in their intended purposes by virtue of an individual’s activities, association,or interests outside his or her primary company affiliation.

• Defalcation: To appropriate company assets fraudulently to ones own uses; defalcation is synonymous with misappro-priation.

• Error: Unintentional mistakes in financial or accounting data. An error may include: 1. mathematical or clerical

mistakes in the underlying records and accounting data;

2. Oversight or misinterpretation of facts; or

3. misapplication of accounting policy.

• Fraud: The intentional misre-presentation of facts undertaken to mislead management,auditors, or other users offinancial statements; i.e., themisappropriation or misuse of company assets, and othersimilar irregularities. Fraud may involve: 1. Manipulation, falsification, or

alteration of records, ordocuments;

2. misappropriation of company assets;

3. suppression or omission of transactions or the effects of transactions from company records or documents;

4. Recording transactions without substance;

5. manipulation of accounting policies; or

6. Any other act or series of acts intended to defraud the company.

• Irregularity: Intentional mistakes or distortionsoffinancialstatements,

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such as misrepresentation or misappropriation of assets.

• Misappropriation: Any dishonest or fraudulent act which includes such things as: 1. Unauthorized use, taking,

or destruction of company propertyforpersonalgain,ortopurposely deprive the company of its use;

2. Forgeryoralterationofchecks,drafts, promissory notes, andsecurities;

3. Anytakingorunauthorizeduseof company funds, securities,supplies,oranyotherasset;

4. Forgery or alteration of policy-related items, such as loans,assignments, changes inbeneficiaries,etc;

5. Any irregularity in the handling or reporting of cash transactions;

6. Fraudulent or conflict of interest decisions which result in financial loss to the company; or

7. Any similar or related irregularity.

D. Preliminary Investigations The Auditor shall initiate a preliminary investigation of any reported or suspected misconduct to verify that there is substance in fact to the suspected irregularity and whether the company has sustained any actual losses. In conductingthispreliminaryinvestigation,the Auditor shall gather sufficient information to identify the company function, activity, department, or unitinvolved; the individual(s) involved; and the estimated magnitude of any loss. During the course of the preliminary investigation the Chief Internal Auditor may,whereappropriate:

• Identify each account or set ofrelated accounts that were, orcould be used in or affected by thedefalcation,anddeterminethepurpose of each account and how it can be used;

• Identify the types of transactions/documentsused tomakeentries,adjustments, and/or inquiriesagainst each account and who may initiate and authorize suchtransactions/documents;

• Determine the source of fundsinvolved in the fraudulent activity;

• Determine whether the companyfunction, activity, department, orunit involved has experiencedunusual or unexplained losses inthe recent past;

• Determinethetypesofquestionableactivities thathaveoccurred,maybeoccurring,orcouldoccur,howthe possible irregularities were committed, all likely means ofconducting the alleged activities,and the personnel potentially involved;

• Determine the degree of reliancewhichshouldbeplacedonexistinginternalcontrols,andtheextentoftesting required;

• ConductapreliminarymeetingwiththeAuditCommitteeoftheBoard,theManaging Director, and othermembers of seniormanagement,as appropriate. If the preliminary findings indicate

that the available evidence has no substanceinfact,theinvestigationshallbe terminated, and the appropriatemembers of company management will be notified. If the preliminary findings show the evidence to be of sufficient strength to justify continued investigation or immediate action, acomplete audit or investigation shall be conducted by the Auditor. E. Investigation The investigation may be continued to further substantiate the size andtype of loss and/or to identify the

responsible individuals. During this phase, the Auditor must select thespecific auditing procedures that in his judgment are necessary to successfully complete the investigation. To facilitate a successful result, the Auditor may,among other things: • Chart the flow of transactions

and documents identified during the preliminary investigation and identify key basic control points throughout the flow;

• Collect all the necessarydocuments, records, files, andcorrespondence that will be examined;

• Copyandcataloguealldocumentsto develop audit work papers on which to make notations and cross-references;

• Examine and evaluate thedocumentation collected, lookingspecificallyforerrors,irregularities,alterations, missing documents,and how the documents were processed;

• Review the budgetary controlsystem in place for developing the budget and assurance of budget compliance; or

• Evaluate the effectiveness ofexistinginternalcontrols.

F. DispositionThe final responsibility for matters involving a misappropriation of company assets rests with company management. Upon completion of the investigation and/or audit, a writtenreport may be submitted to the Audit Committee of the board and the managing Director. Copies of all such investigation and/or audit reports may also be sent to other members of senior management if appropriate; these reports shall be deemed “confidential,” and the Auditor shalltake appropriate measures to ensure their limited distribution to those individuals with a legitimate business need for possessing the information contained therein.n

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INTERNATIONAL TAXATION


Construction PE – Basic Concepts and issues

When a foreign enterprise undertakes any work in India involving construction, assembly, installation, or, commissioning of any building, project or supervisory activities in connection therewith, a question arises whether such activities create the foreign enterprise’s Permanent Establishment (PE) in India. The foreign enterprise will be liable to tax in India only if the PE exists. This article analyses the basic concepts and certain issues in respect of the concept of Construction PE as enumerated under the tax treaties.

India’s rise in recent years is a most prominent development in the world economy. It has reemerged as one of the fastest growing economies in the world. With an upsurge in investment and robust macroeconomic fundamentals, its future outlook is distinctly upbeat. According to many commentators, India could increase its growth rate, provided it improves the infrastructure facilities, which are at present not sufficient to meet the growing demand of the economy. therefore, Indian Government’s first priority is rising to the challenge of maintaining and managing high growth rate through investment in infrastructure sector among others.

the demand for infrastructure investment during the 11th Five Year plan (2007-11) has been estimated to be Us$ 492.5 billion (planning Commission, 2007). to meet this growing demand, the Government of India has planned to raise the investment in infrastructure from the present 4.7 per cent of GDp to around 7.5 to 8 per cent of GDp in this Plan. With the increased focus on the development of infrastructure sector, there is an increased activity in private investments through foreign direct investment (FDI) and development/

enhancements of capacity by the Indian groups also.

Double taxation Foreign companies executing infra-structure projects in India would be subject to several direct and indirect tax exposures. One of the principal direct tax exposures arising in the construction projects is taxing of the income of the foreign entity arising from the construction project in India. In such a scenario, the income of a foreign entity from a construction project could be subject to taxation in India on the source basis as well as the same could be taxable in the foreign country on the residency basis. to prevent double taxation of income, normally countries enter into an agreement known as Double taxation Avoidance Agreement (DtAA), which generally allocates rights of taxing a particular income between residence country and source country.

Normally, such activities may constitute a business connection under the Indian Income-tax Act, 1961 (Act). Under the Act, there is no distinction between construction pe and non construction pe while defining the term business connection. In this article, the concept of Construction pe as

(Contributed by the Committee of International Taxation of the ICAI. Com-ments can be sent to [email protected].)

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…in India we have the concept of ‘business connection’. The PE concept marks

the dividing line for businesses between doing business with a country and doing a business within that country. As the Indian judiciary puts it, the words permanent establishment postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country, which can be attributed to a fixed place of business in that country.

enumerated under the DtAA has been analysed and the readers are also required to analyze the taxability under the Act before arriving at a conclusion.

Concept of Permanent Establishment (PE)the concept of pe has gained considerable importance with the growing trend of globalization. the concept of a pe is important for several Articles of the DtAA; the concept or its cognate also appears in the domestic laws of some countries. For example, in India we have the concept of ‘business connection’. the pe concept marks the dividing line for businesses between doing business with a country and doing a business within that country. As the Indian judiciary puts it, the words permanent establishment postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country, which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country. the primary use of the pe concept is to determine the right of a country to tax the profits of an enterprise of another country. In short, pe is a term defined in tax conventions to determine when a non-resident is taxable in a source country.

A. Construction PE – basic conceptIn the case of construction/installation projects, taxable event will arise in the source country only when the foreign entity has a construction permanent establishment (construction pe) in the source country. Construction pe would be triggered if a construction site or installation project is executed in a host country beyond a particular threshold period. thus, it can be said that the concept of construction pe is an extension of the normal pe.

I. Definition of Construction PE: Different tax treaties define Construction pe in different manners. However, normally a tax treaty follows any one of the following model Conventions:a) the United Nations model

Convention (UNmC);b) the OeCD model Convention

(OeCD mC); andc) the United states model

Convention.Article 5(3) of OeCD mC defines

the construction pe as “A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.” Further, Article 5(3) of UNmC states that the term pe also encompasses “A building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than six months.”

In this regards, it is interesting to note the concept that in case a foreign entity is carrying on a construction activities, it would be covered by construction pe clause and not the fixed place pe clause, i.e. specific provisions of construction pe will override the general provisions of Fixed place pe. Hence, even if there is a fixed place of business through which a foreign entity is carrying on activities, any project for construction or installation work carried on by such enterprise would fall under the Article 5(3) of construction pe and not under Article 5(1) relating to fixed place pe. this principle has also been applied by mumbai ItAt in the case of ADIT vs Valentine Maritime (Mauritius) Ltd (2010-TIOL-195-ITAT-MUM) wherein it has been held that when there is construction activity carried on through a fixed place, unless the specified activity crosses the time threshold of construction pe, there would not be a pe even if there is a fixed place pe. the relevant observations of mumbai ItAt are reproduced hereunder:

“In a way, thus, the permanence test for existence of a PE stands substituted, to this limited extent, by a duration test for certain types of business activities, i.e. building construction, construction or assembly project, or supervisory activity connected therewith. There is also a valid, and more holistic view of the matter, that this duration test does not really substitute permanence test, but only limits the application of general principle of permanence test in as much as unless the activities of the specified nature cross the threshold time limit of nine months, even if there exists a PE under the general rule of Article 5(1), it will be outside the ambit of definition of PE by the virtue of Article 5(2)(i)”similar interpretations have also

been made by Authority of Advance ruling (AAr) in the case of Cal Dive Marine Construction (Mauritius) Ltd [315 ITR 334 (AAR)], wherein the AAr made the following observations: “…If the opening para of Art.5 is

to be read on stand-alone basis, then clause (i) of para 2 will be rendered ineffectual and perhaps otiose. Such construction should be avoided especially while reading

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and understanding a Treaty provision ... In relation to a building site and construction/assembly project, the prescribed minimum period should be read into the expression ‘fixed place of business’ occurring in para 1. As clarified earlier, it is implicit in the very concept of PE and the expression ‘fixed place of business’ that it should be in existence for a fairly long time and merely carrying on some activities intermittently or for a short while does not impress the place with the character of a fixed place through which the business of the enterprise is carried on.”similar observations have also

been made in the following judicial precedents:i) Hyundai Heavy Industries Co. Ltd.

(2009-TIOL-394-ITAT-DEL) (Delhi ITAT)

ii) Brown and Root Inc [(1999) 103 Taxman 515 (AAR)]

iii) P. No. 11 [(1995) 228 ITR 55 (AAR)]iv) P. No. 24 [(1996) 237 ITR 798

(AAR)] v) Horizontal Drilling International S.A.

v CIT [(1999) 237 ITR 142 (AAR)]

Difference between OECD MC and UNMC

OECD MC UNMC

Definition under OeCD mC is wider that includes “assembly project” and “supervisory activities” under the Construction pe

Definition under UNmC is slightly narrower and restricted Construction pe to building site, construction project and installation project only

OeCD refers to the activities which are carried on over a period of twelve months as pe

UNmC defines constitution of pe if activities are carried on for the period of six months

Note: majority of the Indian DtAAs is based on the UNmC model. It defines construction pe if the project has duration exceeding six months.

II. Inclusions: the term Construction pe is widely defined and the

words, building site, construction or installation project may include:

• Construction / renovation ofbuildings, roads, bridges or canals

• Onsite planning and supervisionactivities

• Demolitionandclearingoperationsnot necessarily followed by building or construction work

• Layingofpipelines• Excavating,dredgingandincidental

activities• Installationprojects• Assemblyprojects

Further, the OeCD mC also states that if an office or a workshop is used for a number of construction projects and the activities performed in the office crosses the threshold limit of construction pe, the office would be considered as pe even if none of the projects involves a building site, construction or installation project that lasts for more than 12 months.

DtAAs entered by India with Us, UK, Hungary, UAe, etc., include supervisory activities also as a part of Construction pe, whereas the DtAAs with Greece, France, egypt, Netherlands, etc., do not include this clause. Further, in some DtAAs entered by India, e.g. in the India-UK DtAA,

the supervisory activities rendered in relation to construction activities would constitute a construction pe if the charges relating to supervisory activities exceed 10 per cent of the sale price of machinery even if the threshold limit is not crossed.

B. Issues arising in Construction PE1. Beginning of Threshold Period:

A building site or construction, assembly or installation project becomes a pe, if the site, construction or project lasts in excess of the time limit specified in the relevant DtAAs. However, in different DtAAs entered by India, the time limit for determining construction projects varies from being 3 months in the case of Norway to 12 months in the case of Cyprus. thus, the provisions of respective DtAA would need to be examined while determining existence of a construction pe in India.Here, it is interesting to note that in

the DtAA entered into with Greece, no specific number of days is prescribed for determining the construction pe. Accordingly, a Greek company carrying on construction work even for single day would give rise to construction pe in India. In computation of time limit, following points should be considered:

Commencement of threshold time limit: threshold time limit begins when the enterprise starts to perform business activities on the spot in connection with a building site, construction or assembly project. Further, OeCD mC states that while computing the time period, time previously spent by the contractor concerned on other sites or projects which are totally unconnected with it should not be included. the day, when an employee of the contractor arrives at the building site, can be taken as a practical starting point for computing the time limit. the time

DTAAs entered by India with US, UK, Hungary, UAE, etc., include supervisory

activities also as a part of Construction PE, whereas the DTAAs with Greece, France, Egypt, Netherlands, etc., do not include this clause. Further, in some DTAAs entered by India, e.g. in the India-UK DTAA, the supervisory activities rendered in relation to construction activities would constitute a construction PE if the charges relating to supervisory activities exceed 10 per cent of the sale price of machinery even if the threshold limit is not crossed.

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limit so begin would continue till the work is completed or permanently abandoned.

Further, if the planning and supervision activity is carried out by other enterprise whose activities in connection with the construction concerned are restricted to only planning and supervisory work, time spent by the other agency should be excluded while computing the threshold time period.

Judicial Precedents• In the case of BKI/HAM VOF, (70

TTJ 480) (Delhi), the ItAt held that a dredging contract does not start from the date of arrival of the dredger in the country, but it starts from the commencement of the dredging activity.

• AAR in the case of Cal Dive Marine Construction (Mauritius) Ltd. vs DIt (315 Itr 334) has held that occasional short visits of contractor’s personnel for negotiations or doing some paper work in connection with the project or for taking the soil samples, broadly speaking, will not trigger the start of the time-limit. Also, the date of signing the contract is not relevant while computing the time period for determining the construction pe.

• It is also interesting to note thejudgment of Delhi ItAt in the case of Hyundai Heavy Industries Co. Ltd. (2009-TIOL-394-ITAT-DEL), wherein the ItAt held that no pe of the taxpayer could be held to be in existence in India until the taxpayer began its project of undertaking installation activities. the ItAt observed that the designated work outside India was carried on much before the dates of the structures coming into existence in India. In this regard, reliance was placed on the decision of the supreme Court (sC) in the case of CIT vs. Hyundai

Heavy Industries Co. Ltd.[291 ITR 482], wherein it was held that where the pe came into existence after fabrication but, before installation, the profits relating to fabrication outside India cannot be taxable.

2. Aggregation of Sites: Whether various building sites in one country should be aggregated at the time of determining threshold period given in the DtAA is the issue of debate. As per para 18 of OeCD mC and UNmC, the time limit for determining construction pe, the time limit of 6 months or 12 months as the case may be, applies to each individual site or project (which are not connected with each other) and should not be aggregated.In this regard, it is interesting to note

Article 5(4) of OeCD mC which states that business activities performed by the same foreign entity at different sites (none of which individually constitute a pe) cannot lead to a pe if they are aggregated together. Hence, applying similar analogy, if a particular site is not a pe, aggregation of all similar sites cannot constitute a pe. the same view has been advocated by the learned authors Klaus Vogel and Arvid skaar also. However, a building site should be regarded as a single unit, even if it is based on several contracts, provided that it forms a coherent activity/site commercially and geographically.

Judicial Precedents• In the case of Sumitomo Corpo-

ration, (110 TTJ 302), Delhi, ItAt held that there could be different pes with reference to different un-connected contracts even though each contracts may be entered into by the same parties. In the given case,MarutiUdyogLimitedaward-ed various supervisory contracts on sumitumo Corporation which were to be executed independently at different sites in the factory of MarutiUdyogLtd.Sincetherewas

no effective connection between such contracts, it was held that minimum period of number of days was to be counted separately for each contract and could not be ag-gregated.

• MumbaiITATinthecaseofKrupp Uhde GMBH vs Addl. CIT (28 SOT 254) followed the above judgment of sumitomo and held that time spent on unconnected projects cannot be clubbed while determining the time period for construction pe.

• Further, Mumbai ITAT in thecase ADIT vs Valentine Maritime (Mauritius) Ltd (2010-TIOL-195-ITAT-MUM) made following interesting observations:

“Coming back to the provisions of Article 5(2)(i), even a plain reading of Article 5(2)(i) would show that, for the purpose of computing the threshold time limit, what is to be taken into account is activities of a foreign enterprise on a particular site or a particular project, or supervisory activity connected therewith, and not on all the activities in a tax jurisdiction as whole…

…Unless the activities are of such a nature as to be viewed only in conjunction and as a coherent whole, in our humble understanding, there is no justification in aggregation of time spent on various business activities, sites or projects of the enterprise. In this view of the matter, strictly

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…it is interesting to note Article 5(4) of OECD MC which states that business

activities performed by the same foreign entity at different sites (none of which individually constitute a PE) cannot lead to a PE if they are aggregated together. Hence, applying similar analogy, if a particular site is not a PE, aggregation of all similar sites cannot constitute a PE.



speaking, it is not really relevant whether the activities so carried out by the enterprise are for the same principal or different principals. The relevant considerations, in our considered view, are the nature of activities, their interconnection and interrelationship and whether these activities are required to be essentially regarded as a coherent whole in conjunction with each other.”thus, if the sites are not

connected with each other and there is no interrelationship between the different sites though executed by the same contractor the same cannot be aggregated for the purpose of computing the threshold limit for pe perspective.

India’s Comments on OECD MCHowever, India does not agree with this position and in its latest comments in the OeCD report has observed that a series of consecutive short term sites or projects operated by a contractor would give rise to the existence of a permanent establishment in the country concerned. thus, according to India, the time limit would not apply to each individual site or project but for all projects combined together.3. Time Spent by Sub-Contractor:

Another point of discussion while deciding construction pe is the time spent by the sub-contractors on the site/project. As per the OeCD mC and views of the authors Vogel and skaar, the period spent by a subcontractor working on the building site must be considered as being time spent by the general contractor on the building project. Further, time spent by sub-contractor can be counted only for the purpose of deciding whether the project/site have exceeded the minimum threshold limit as given in the respective DtAA. In

any case, the sub-contractor itself can constitute a construction pe if his activities last for more than threshold time limit. Further, attention can be drawn

to the recent decision of AAr in the case of PINTSCH BAMAG (2009-TIOL-23-ARA-IT) wherein AAr held that sub-contractor’s activities, which are not carried on on-site and which are separable from the work carried out at site, cannot be considered as a pe for the main contractor. relevant observation of AAr is reproduced hereunder: “11.1. The context in which the

passage occurs is important. The said passage, as I understand it, covers a situation where a building site has been set up by the main contractor and the services of the sub-contractor are also deployed in aiding the execution of the building project. Apparently, it applies to a situation where there is conjoint effort of both the contractor and the sub-contractor at the building site. In such a case, the building site of the contractor and sub-contractor is inseparable. Here, the fact situation is entirely different. The entirety of work of fabrication and assembly is carried out by the sub-contractor at the workshop set up by him at

a place for away from installation site and run by him independent of any control of the applicant. Such a place of business of sub-contractor cannot be regarded as the PE of applicant. In any case, the language of section 5(1) being clear and as the concept of PE does not take in the establishment of an independent contractor or agent, the contention of the Revenue must fail.”thus, unless the activities of

sub-contractor/time spent by sub-contractor are inseparable from the building site/construction project, time spent by them cannot be counted while computing the threshold limited.4. Temporary Suspension of Activities:

sometimes due to unavoidable circumstances, there are delays in the execution of project or temporary suspension of the activities. Issue is whether time lost due to the stoppage or temporary suspension of activities is to be counted while computing the threshold limit for the constitution of pe.As per OeCD mC and commentary

by prof. Vogel, a site does not cease to exist when the work is temporarily discontinued. Interruptions, which are usual in the normal course of activity, constitute part of minimum period. the examples of temporary interruptions are interruptions due to bad weather, normal snowfall, temporary interruptions due to shortage of material, labour difficulty, etc. thus, for example, if a contractor started work for a construction of a road on may 1 and stopped on November 1 because of bad weather conditions or a lack of materials, but resumed work later on February 1 the following year completing the road on June 1, his construction project should be counted from may 1 to June 1 and it would result into a pe, as it would cross the 12-month time limit laid under the OeCD mC.

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However, India does not agree with this position and in its latest comments in

the OECD report has observed that a series of consecutive short term sites or projects operated by a contractor would give rise to the existence of a permanent establishment in the country concerned. Thus, according to India, the time limit would not apply to each individual site or project but for all projects combined together.



With regard to intentional interruptions, a view is that such interruptions would not suspend the time limit. One of the examples mentioned has been that a sub-contractor may suspend his work due to lack of progress in other parts of the project. there is a possibility that this view may be applied to planned interruptions. However, as per the skaar’s commentary, time limit can be suspended in a case where the interruption is caused by extraordinary circumstances which are neither avoidable by efforts of the contracting parties nor foreseen by the contractor. the examples dealt with are extraordinary weather conditions, strikes, riots, war, etc. 5. Continuing Projects – Roads and

Pipelines Keep on Moving: In cases like roads, canals, laying of pipelines, etc., nature of construction or installation project is such that the activities are not fixed at a single location and has to be relocated continuously from

one place to another. In such cases, the fact that the work force is not present for threshold time limit in one particular location is immaterial. the activities performed at each particular spot are part of a single project, and that project must be regarded as a permanent establishment if, as a whole, it lasts more than prescribed time limit.

6. Ending of Threshold Time Period: the pe would normally cease to exist when all activities relating thereto are completed and the site is no longer required. OeCD Commentary para 19, page 93 says that in general, the site continues to exist until the work is completed or permanently abandoned. However, as mentioned above, a site should not be regarded as ceasing to exist when work is temporarily discontinued. thus, when trial run is over for installation or assembly projects or when building or construction is found to be complete without any defects, threshold period should end there. Further, any repairs and

maintenance work performed or after sale services after the construction or installation project is completed should not be counted while computing the time limit of pe.

Judicial Precedents• Attentionisdrawntoadecisionof

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In cases like roads, canals, laying of pipelines, etc., nature of construction or

installation project is such that the activities are not fixed at a single location and has to be relocated continuously from one place to another. In such cases, the fact that the work force is not present for threshold time limit in one particular location is immaterial. The activities performed at each particular spot are part of a single project, and…



AAr in the case of Cal Dive Marine Construction (Mauritius) Ltd (supra), wherein it was held:“8.3. As regards the termination

of the construction project, mr. skaar observed that: “The end of the construction

project determines the end of the source state’s jurisdiction over the contractor’s activity. The point of departure is that the construction task is terminated when the work is completed, permanently discontinued, or the building site is permanently abandoned. The end of the “physical” work could be an alternative end of the construction period.”thus, as soon as the construction

project is completed, the pe would cease to exist. thus, ending of threshold limit is quite subjective and depends on the facts of each case.7. Presence over two years: An

interesting issue would arise when a contract is spilled over two different fiscal years. It may happen that a project or site may last for more than the months specified in a particular DtAA, but the presence extends over two different financial or taxable years, e.g. let us assume that DtAA specifies the time limit of six months and the time taken by the project is eight months out of which

three months are in first financial year and the rest five months are in the next financial year. In such a case, the provisions of relevant DtAA should be evaluated while determining whether the project constitutes pe or not and if yes, from which date. View expressed by OeCD mC is

that the time limit has to be computed in totality irrespective of number of days. Hence, in total if the threshold limit is crossed than it would give rise to pe irrespective of the fact that in a particular year, the threshold limit was crossed or not.

Commentary by prof. Vogel advocates the view that if the threshold limit is crossed than pe is deemed to have existed from the day one the pe commenced its activities. Hence, the threshold limit has to be seen in totality over a period of time and it makes no difference whether the part of period falls in one year and part period in next year. However, one may need to carefully examine the wordings of the relevant DtAA before taking any view.

the above view is also corroborated by the decision of mumbai ItAt in the case of Krupp Uhde GMBH vs Addl. CIt (28 sOt 254) wherein it is held that the threshold limit is to be counted irrespective of the financial year. thus, mumbai ItAt held that the time threshold has to be seen in aggregate irrespective of the number of years involved. the relevant observations of mumbai ItAt are: “33. The next question for our

consideration is whether the period under Article 5 should be calculated with reference to each year. There is no case law on this point. But considering the rule that period commences when the activity commence and ends on the completion of the contract, we are of the view that the minimum period of six months has to be counted irrespective of the years involved. An

activity may start in January and may end in July. In such case the total period is more than 6 months but falls under two financial years. If the period of each year is to be counted then in each year period would be less then 6 months. Such construction, in our opinion, would defeat the object behind such provisions. In this connection, we may also usefully refer to page 307 of Commentary by Klause Vogel wherein in para (c) it is stated as under:

“c) .........It makes no difference to the time test whether the activities in question extend over more than one calendar year or one assessment period. If part of the period were to be in one year, and the remainder in the next, this would not prevent a permanent establishment from coming into existence. For the calculation of the time limit when applying a DTC in the new German Lander (former GDR), see FinMin Sachsen - Anhalt of 12 February 1992, St Ed 157 (1992).”

In view of the above discussion, it is held that the minimum period of six months is to be counted from the date when activity starts till the date when the contract is completed irrespective of the year/years to which such period relates.”

Conclusion Infrastructure projects are a key to the development of India’s economy; there are many taxation issues which are either evolving or still to be determined. therefore, adopting the correct tax position is critical. Further, there are various other important issues such as permanent establishments and the taxability of epC contracts, which need to be considered at the time of entering into a contract. tax efficient structuring of contracts can have a potentially decisive impact, especially in the bid process, and can provide a clear competitive advantage. n

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It may happen that a project or site may last for more than the months specified

in a particular DTAA, but the presence extends over two different financial or taxable years, e.g. let us assume that DTAA specifies the time limit of six months and the time taken by the project is eight months out of which three months are in first financial year and the rest five months are in the next financial year.

TAXATION


Treatment of Price Difference Between the Date of Removal and Revised PriceThere is an obligation on part of the assessee under the provisions of Central Excise Act, 1944 to levy and remit excise duty to the credit of the Central Government on self-assessment basis. Failure to deposit central excise duty or short levy of duty or short payment of service tax will attract the payment of such duty along with the interest as prescribed by the Central Government now and then. Central Excise duty is assessed on the transaction value of the goods at the time removal of the same. What treatment should be given in case any revision of price in the price of the goods. Revision of price may lead to reduction in price or increase in price. This article discusses the treatment to be given in such situation and the liability of the assessee to pay the differential duty on differential price and interest, if any, and also penalty.

Interest on Delayed PaymentRule 8 of the Central Excise Rules provides that the duty on the goods removed from the factory or the warehouse during a month shall be paid by the 5th day of the following month. In case of goods removed during the month of march, the duty shall be paid by 31st day of march itself. If the assessee fails to pay the amount of duty by due date he shall be liable to pay the outstanding amount along with interest at the rate specified by the Central Government vide Notification under section 11Ab of the Act on the outstanding amount, for the period starting with the first day after the due date till the date of actual payment of the outstanding amount.

Rule 6 provides that the assessee shall himself assess the duty payable on all excisable goods. The transaction value plays a vital role in excise duty

payment. section 4(3)(d) of the Central Excise Act defines transaction value as the price actually paid or payable for the goods when sold and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of the assessee, by reason or in connection with the sale, whether payable at the time of the sale or at any other time including, but not limited to, any amount charged for or to make provision for, advertising or publicity, marketing and selling organisation expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.

IssueExcise duty is levied on the transaction value. The issue taken for this article

CA. M. Govindarajan (The author is a member of the Institute. He can be reached at [email protected])

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TAXATION


is in case of any revision in the price of the product in the later period after removal of the goods what treatment should be given in this situation. There is a possibility of revision of the prices due to various reasons. The prices may increase or decrease. Decrease in Price:In case of decrease in price, the liability of the assessee will not be affected. The supreme Court in MRF Limited V. Commissioner of Central Excise, Madras 1997 (92) ELT 309 (SC) held that any reduction in price subsequent clearance of goods on payment of duty for whatever reason did not affect the manufacturer’s liability for the payment of duty. In this case the judgment was on interpretation of section 11b of the Act, which concerns claim for refund of duty by the assessee. That judgment was in the context of the price list approved on may 14, 1983. In that case, assessee had made a claim for refund of excise duty on the differential between the price on the date of removal and the reduced price at which tyres were sold. The price was approved by the Government. The assessee submitted that its price list was approved by the Government on may 14, 1983, but subsequent thereto, on account of consumer resistance, the Government of India directed the assessee to roll back the price to pre-may 14, 1983 level and, on that account, price differential arose on the basis of which the assessee claimed refund of excise duty which stood rejected by this Court on the ground that once the assessee had cleared the goods on classification, the assessee became liable to payment of duty on the date of removal and subsequent reduction in the prices of whatever reason cannot be made a matter of concern to the Department insofar as the liability to pay excise duty was concerned.Increase in Price:

In case of increase in price after clearance of goods either by escalation

Rule 8 of the Central Excise Rules provides that the duty on

the goods removed from the factory or the warehouse during a month shall be paid by the 5th day of the following month. In case of goods removed during the month of March, the duty shall be paid by 31st day of March itself. If the assessee fails to pay the amount of duty by due date he shall be liable to pay the outstanding amount along with interest at the rate specified by the Central Government vide Notification under Section 11AB of the Act on the outstanding amount, for the period starting with the first day after the due date till the date of actual payment of the outstanding amount.

clause or by negotiation, the seller will collect the differential price from the buyer. Then the seller is to pay the excise duty on the differential price to the credit of the Department. Is the assessee in such cases liable to pay interest for the differential duty? Discussed below are some cases in this regard.

In the following cases, it was held that the assessee is not liable to pay interest in such cases:

The Commissioner of Central Excise, Aurangabad vs. M/s Rucha Engineering Pvt. Ltd., - 2008 (223) ELT 161 (Bom), the High Court observed that it is evident that section 11Ab comes into play if the duty paid/levied is short. both the Commissioner (Appeals) and the CEsTAT have observed that the Assessee paid the duty on its own accord immediately when the revised rates became known to them from their customers. The differential duty was due at that time, i.e. when the revised rates applicable with retrospective effect were learnt by the Assessee, which was much after the clearance of the goods and, therefore, question of payment of interest does not arise as the duty was paid as soon as it was learnt that it was payable. Finding that provisions of sections 11A(2) and 11A(2b) were not applicable as the situation occurred in the instant case was quite different, section 11Ab(1) was not at all applicable and therefore the assessee was not required to pay interest.

In ‘Commissioner of Central Excise, Panchkula vs. Polyplastics’ – 2009 (236) ELT 210 (P&H), the High Court held that it is well settled that in order to raise a demand for payment of interest under section 11Ab of the Act the condition precedent is the existence of an order determining the duty under section 11A(2) of the Act or the duty must have been paid on their own accounts in the manner prescribed under section 11Ab(2) of the Act.

The Commissioner in his order has observed that the dealer had made himself liable to pay interest in terms of section 11Ab of the Act on differential amount of duty which has been paid later. The aforesaid approach is not correct because there is no cause of any non payment, short levy or short payment as envisaged under section 11A(1) of the Act. section 11A(2) of the Act contemplates entirely a different situation than the one in hand and therefore it has to be held that the provisions of section 11Ab(2)(b) of the Act are not attracted to the facts of the present case.

In ‘Commissioner of Central Excise, Vadodara – I vs. Chloritech Industries Ltd.,’ – 2009 (235) ELT 17 (Guj), the High Court held that if at the given point of time when the transaction took place the additional price was not fixed, the liability of the buyer to pay the additional amount was not known to the

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buyer, mere existence of an escalation clause in the contract between the parties cannot bring the subsequent escalation with the meaning of the definition for the purposes of levying interest. Duty of excise would become payable even subsequently in point of time and that is the admitted position between the parties, the assessee having already discharged the liability. section 11Ab of the Act itself says that interest is to be paid on the amount short paid from the first date of the month succeeding the month in which the duty ought to have been paid under the Act. Therefore, the provisions of section 4 of the Act have to be read in context of the requirement, namely, whether there was any liability to pay duty under the Act at the point of time when the transaction was entered into. If neither side to the transaction was aware as to the amount which was to be charged and which was to be paid under the escalation clause on the date when the transaction was entered into, no liability to pay interest can arise

under the provisions of section 11Ab of the Act.

In ‘Klassic Wheels Private Ltd., vs. Commissioner of Central Excise, Aurangabad’ – 2009 (240) ELT 47 (Tri. Mumbai), there is no challenge against the demand of differential duty. The challenge is against the demand of interest on the differential duty as also against the imposition of the penalty. The appellant relied on the High Court judgments in ‘Commissioner of Central Excise, Panchkula vs. Polyplastics’ (supra) and Klassic of Wheels Private Ltd., vs. Commissioner Central Excise, Aurangabad’ (supra). The High Court held that it appears from the records that the assessee paid differential duty promptly upon receipt of differential price from their buyers. There was no delay whatsoever in this matter. Therefore, it can hardly be said that they indulged in suppression of facts with intent to evade payment of differential duty. The allegation to the contrary levelled against the assessee in the show cause notice is baseless and, therefore, there is no question of the assessee being penalised under section 11AC of the Act. The High Court vacated the penalty imposed.

In the following cases, it was held that the assessee is liable to pay interest in such cases:

In ‘Lucas TVS Limited vs. Commissioner of Central Excise, Chennai’ – 2009 (233) ELT 192 (Tri. LB), the Larger bench discussed the issue in detail. The assessees are engaged in the manufacture of excisable goods. During the material period they had paid duty of excise on the goods manufactured in the manner laid down under Rule 8(1) of Central Excise Rules. such payments at the time and place of removal of the goods were made on the assessable value based on the price originally agreed between the assessees and their buyers. subsequently there was upward price revision of the goods

due to increase of cost of raw material and/or other factors and, consequently the assessees issued supplementary invoice for realising the differential price from the buyer and paying differential duty. such payment of differential duty was made without payment of interest. In most of the cases there was no express provision for variation of price in the contract between the assessee and the buyer. In each case, the Department issued show cause notice demanding interest on such duty under section 11Ab for the period from the first day of the month succeeding the month in which the original duty payment was made to the date of payment of differential duty. The show cause notice also proposed the penalty for the default of payment of interest. The assessees contended that the additional duty paid under supplementary invoice consequent to revision of price was not an amount of duty which ought to have been paid at the time and place of removal and, therefore, it was not a duty ‘short paid’ or short levied’ within the meaning of these expressions used in section 11A(2b) and, hence, section 11Ab was not applicable.

The Tribunal referred the matter to the Larger bench to consider and decide the following issues:1. Whether, to the facts and

circumstances of these cases, the additional amount paid by the buyer towards the price of the goods in terms of the supplementary invoice issued by the assessee after the removal of the goods can be considered to be part of the ‘transaction value’ under section 4 of the Central Excise Act?

2. Whether the payment of duty under the supplementary invoice by the assessee is covered by sub-section 2b of section 11A of the Act?

3. Whether, on the amount of duty paid under the supplementary

In case of decrease of price, the liability of

the assessee will not be affected. The Supreme Court in MRF Limited vs. Commissioner of Central Excise, Madras 1997 (92) ELT 309 (SC) held that any reduction in price subsequent clearance of goods on payment of duty for whatever reason did not affect the manufacturer’s liability for the payment of duty. In this case the judgment was on interpretation of Section 11B of the Act, which concerns claim for refund of duty by the assessee. That judgment was in the context of the price list approved on May 14, 1983.

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to clearance of the goods was not a part of transaction value defined under section 4(3)(d) of the Act and therefore, the amount paid to the Revenue in terms of supplementary invoices was not duty;

• In ‘Commissioner vs. Arvind Mills’ – 2006 (204) ELT 570 (Tri. LB), it was held by the Larger bench that the price payable at a later date could not be said to be price payable at the time of removal and, therefore, could not be considered as ‘transaction value’ at the time and place of removal;

• This payment was the one falling under section 11D of the Act; As the duty collected from the buyer under supplementary invoice in excess of the duty paid at the time of removal of the goods was paid forth with

In ‘Commissioner of Central Excise, Vadodara – I vs.

Chloritech Industries Ltd.,’ – 2009 (235) ELT 17 (Guj.), the High Court held that if at the given point of time when the transaction took place the additional price was not fixed, the liability of the buyer to pay the additional amount was not known to the buyer, mere existence of an escalation clause in the contract between the parties cannot bring the subsequent escalation with the meaning of the definition for the purposes of levying interest. Duty of excise would become payable even subsequently in point of time and that is the admitted position between the parties, the assessee having already discharged the liability.

invoice, interest is leviable under section 11Ab from the first date of the month succeeding the month in which duty was paid in the first instance in terms of the original invoice?

4. Whether the Central Excise Act or the Central Excise Rules contain any provision for recovery of interest payable under section 11Ab of the said Act on any amount of duty paid under supplementary invoice to in (1), (2) and (3) above?

The Revenue put forth the following contentions:• The differential value realised

by the assessees from their buyers under supplementary invoices was an integral part of the transaction value of the goods and, therefore, the differential duty paid on the differential value would be a duty which ‘ought to have been paid’ at the time of removal of the goods;

• There was a short payment of duty at the time of clearance of the goods which attracted sub-section (2b) of section 11A of the Act;

• Consequently interest under section 11Ab was also payable on the differential duty paid under supplementary invoice, for the period from the first day of the month succeeding the month in which the duty ought to have been paid to the date of actual payment of the duty;

• The Circular of CbEC (F.No. 6/20/2005-CX 1, dated 14.3.2006 clarifies that interest under section 11Ab is chargeable from the date of original clearance in cases where supplementary invoices were raised due to upward revision of price of the goods;

• The assessees were under the

regime of self assessment and had to pay duty on the transaction value, paid or payable, to be determined by them at the time of removal of the goods. For self assessment under Rule 6, it was for them to ascertain whether the price available at the time of removal was final or provisional;

• Whether the contract contained price escalation clause or not, negotiations were held between the assessees and the buyers after the removal of the goods. such negotiations resulted in enhancement of price of the goods already cleared by the assessees and the differential price was paid to them by the buyers under amended purchase orders. In such circumstances, the assessees ought to have invoked Rule 7 for provisional assessment of the goods;

• Had they done so they are liable to pay interest on the differential amount of duty;

• The assessments made at the time of removal of the goods should be deemed to be provisional;

• Levy of interest under section 11Ab was in the nature of compensation as the Revenue was deprived of the benefit of the differential duty for the period during which it was remain unpaid.

The assessees contended the following:• section 4(1)(a) of the Act

provides that time and place of removal are essential for determining transaction value. ;

• What was collected as differential price consequent

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According to the transaction value given under Section

4(3)(d), the ‘transaction value’ includes, in addition to the amount charged as price, any amount that the buyer is liable to pay to the assessee in connection with the sale of goods, whether payable at the time of the sale or at any other time. The Larger Bench held that any amount that the buyer is liable to pay to the assessee by reason of, or in connection with, the sale of the goods, whether payable at the time of sale or at any other time, is part of the transaction value of the goods.

The Larger bench while considering the issues from (1) to (3) analyzed the provisions of section 4(3)(d)(transaction value), section 11A(2b) (short payment/non levy/short levy of duty etc.,), section 11Ab (interest on delayed payment of duty), section 11D (duties of excise collected from the buyer to be deposited with the Central Government), Rule 2 (definition for ‘assessment’), Rule 6 (assessment of duty), Rule 7 (provisional assessment) and Rule 8 (manner of payment).

At the outset the Larger bench rejected the proposition of the assessees that the duty paid under supplementary invoices is an amount collected in excess from the buyer and is, therefore, recoverable only in terms of section 11D of the Act. section 11D applies where a person who is liable to pay duty of excise on the goods sold by him collects from the buyer any amount in excess of duty assessed/determined and paid on such goods, as representing duty of excise. The excess amount collected as duty without the sanction of the law is not recognized as duty of excise and the same is required to be paid to the Central Government under section 11D along with the interest under section 11DD. In the present case it is not the case of the assessees that they collected from the buyers any amount (as representing duty of excise) in excess of the duty assessed and paid. The expression ‘duty assessed and paid’ found in section 11D(1) covers not only the duty assessed and paid at the time of removal of the goods but also the differential duty assessed and paid later.

According to the transaction value given under section 4(3)(d), the ‘transaction value’ includes, in addition to the amount charged as price, any amount that the buyer is liable to pay to the assessee in connection with the sale of goods, whether payable at the time of the sale or at any other

time. The Larger bench held that any amount that the buyer is liable to pay to the assessee by reason of, or in connection with, the sale of the goods, whether payable at the time of sale or at any other time, is part of the transaction value of the goods. In other words, the price collected by the assessee from the buyer at the time of removal of the goods and the differential price collected subsequently in the wake of price revision would together constitute ‘the amount charged as price’ and shall be the core of the transaction value. As this value is referable to the time and removal of the goods, the differential amount of duty paid under supplementary invoice by the assessee is an amount of duty short paid with reference to the time of removal of the goods.

The Larger bench observed that the assessees in the present case self ascertained the amount of duty payable on the differential price of the goods (upon on the buyer having agreed to increase the price of the goods) and paid such duty forth with. Of course, there was no delay in this payment with reference to the time at which the price was increased. The assessees are challenging the demand of interest on this basis. but there was a delay in the payment of such duty with reference to the time of removal of the goods and this is the basis of the Revenue’s demand of interest. The levy of interest on tax is in the nature of compensation as held by the Hon’ble supreme Court. One’s liability to pay compensation arises from his nonfeasance or misfeasance in discharging contractual or statutory obligations. The liability of the assessees in the present cases to pay interest to the Government under section 11Ab of the Act has to be examined with reference to their conduct. They were aware, at the time of removal of the goods from factory, that the originally agreed price was not sufficient to provide a reasonable profit

the Government, no demand of interest can be under section 11DD either;

• As duty was promptly paid by the assessees on differential amounts of price collected by them from their buyers subsequent to the clearance of goods, the Revenue did not incur any loss and therefore the they were not liable to pay interest by way of compensation;

• As the price initially fixed for the goods and indicated in the purchase order was firm, the assessment made at the time and place of removal was not provisional. There was no provision for deemed provisional assessment under the Central Excise Act or Rules made there under;

• As such it is not open to the Department to allege short levy or short payment of duty and to invoke section 11Ab with reference to section 11A(2b) for levy of interest;

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after meeting the costs incurred in connection with the manufacture and sale of the goods. This is the reason they invoked the price escalation clause in the contract, or, in the absence of such clause, initiated negotiations with the buyer for enhancement of the price. In none of these cases did any assessee claim interest from their buyers on the differential price belatedly paid. This would mean that, between the assessee and the buyer, the differential price was deemed to have been paid at the time of removal of the goods itself. If that is so between the assessee and the department also, the differential price should be deemed to have been paid at the time of removal of the goods.

Thus, the Larger bench held the issues (1), (2) and (3) in favor of the assessee. While considering the issue

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(4), the Larger bench considered the submissions of both the side. The assessees contended that there was no mechanism under the Act for recovery of interest on the differential duty. Unlike section 28 of the Customs Act, there is no provision in section 11A of the Act for demanding interest on duty. On the other hand the Department contended that there is a recovery mechanism in sub-Rule (4) of Rule 8 of Central Excise Rule, 2002 which reads as follows: “The provisions of section 11 of the Act shall be applicable for recovery of the duty as assessed under Rule 6 and the interest under sub-Rule (3) in the same manner as they are applicable for recovery of any duty or other sums payable to the Central Government.” It was held that where an assessee pays differential duty (self-assessed under Rule 6) under supplementary invoice

consequent upon upward revision of price after clearance of the goods, such duty, being duty which ought to have been paid at the time and place of clearance of the goods, would attract interest under sub-Rule (3) of Rule 8 as well as under sub-section (1) of section 11Ab. If the assessee does not pay such interest, it can be recovered by the proper Officer of the Central Excise in terms of section 11 of the Act. The Larger bench is also of the view that the power to issue demand notice to the defaulter of interest is also inbuilt in section 11. Thus the argument of the assessees that there was no provision for recovery of interest payable under section 11Ab is not acceptable.

In Commissioner of Central Excise, Pune vs. SKF India Limited – 2009 (239) ELT 385, the Court analysed the provisions of sections 11A, 11AA, 11Ab

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and 11AC. section 11A puts the cases of non levy or short levy, non payment or short payment or erroneous refund of duty in two categories. One in which the non payment or short payment etc., of duty is for a reason other than deceit; the default is due to oversight or some mistake and it not intentional. The second in which the non payment or short payment, etc., of duty is ‘by reason of fraud, collusion or any willful misstatement or suppression of facts, or contravention of any of the provisions of the Act or of Rules made there under with intent to evade payment of duty, that is to say, it is intentional, deliberate and/or by deceitful means. Naturally, the cases falling in the two groups lead to differential consequences and are dealt with differently. section 11A, however, allows the assessee in default in both kinds of cases to make amends, subject of course to certain terms and conditions. The cases where the non payment or short payment, etc., of duty is by reason of fraud, collusion etc., are dealt with under sub-section (1A) of section 11A and the case where non payment or short payment of duty is not intentional under sub-section (2b).

section 11A(2b) provides that the assessee in default may, before the notice issued under sub-section (1) is served on him, make payment of the unpaid duty on the basis of his own ascertainment or as ascertained by a Central Excise Officer and inform the Central Excise Officer in writing about the payment made by him and that in that event he would not be given the demand notice under sub-section (1). but Explanation 2 to the sub-section makes it expressly clear that such payment would not be exempt from interest chargeable under section 11Ab, that is, for the period from the first date of the month succeeding the month in which the duty ought to have been paid till the date of payment of duty. What is stated in Explanation 2 to sub-section (2b) is reiterated in section

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11Ab that states where any duty of excise has not been levied or paid or has been short levied or short paid or erroneously refunded, the person what paid the duty under sub-section (2b) of section 11A, shall, in addition to the duty, be liable to pay interest. The Court held that the payment of differential duty by the assessee at the time of issuance of supplementary invoices to the customers demanding the balance of the revised prices clearly falls under the provision of sub-section (2b) of section 11A of the Act.

In Commissioner of Central Excise vs. International Auto Ltd., - 2010 (250) ELT 3 (SC), the assessee, during the relevant assessment years, supplied auto parts to their customers. since price difference arose between the price on the date of removal and the enhanced price at which the goods stood ultimately sold, the Department issued a show cause notice proposing to levy interest on the differential duty, paid by the assessee, under section 11Ab of the Central Excise Act, 1994.

The assessee submitted the following:• Interest was not leviable under

section 11Ab of the Act, in view of the fact that prices indicated in the purchase orders were final during the period of supply of goods;

• The department has accepted the position that the prices in the purchase orders were final;

• There is no price variation clause in the purchase orders, therefore, there was no scope for increase in prices subsequently and that too, retrospectively;

The supreme Court endorsed the views of the Court in ‘Commissioner of Central Excise, Pune vs. SKF (supra). The supreme Court held that it is clear that the interest is levied for loss of revenue on any count. In the present case, one fact remains undisputed, namely, accrual of price differential. What does price differential price signify? It signifies that value, which is the function of the price, on the date of removal/clearance of the goods, was not correct. That, it was understated. Therefore, the price indicated by the supplementary invoice is directly relatable to the value of the goods on the date of clearance, hence, enhanced duty. This enhanced duty is on the corrected value of the goods on the date of removal. When the differential duty is paid after the date of clearance, it indicates short payment/short levy on the date of removal, hence, interest, which is for loss of revenue, becomes leviable under section 11Ab of the Act.

ConclusionFrom the above discussions it can

be inferred that the assessee is liable to pay interest when he pays differential duty after clearance of goods on the differential price of the goods and the provisions of the Central Act and Rules are very clear in this regard. n

Section 11A(2B) provides that the assessee in default

may, before the notice issued under sub-Section (1) is served on him, make payment of the unpaid duty on the basis of his own ascertainment or as ascertained by a Central Excise Officer and inform the Central Excise Officer in writing about the payment made by him and that in that event he would not be given the demand notice under sub-Section (1). But Explanation 2 to the sub-Section makes it expressly clear that such payment would not be exempt from interest chargeable under Section 11AB, that is, for the period from the first date of the month succeeding the month in which the duty ought to have been paid till the date of payment of duty.

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Overview of Goods and Service Tax Legislation

There is an obligation on part of the assessee under the provisions of Central Excise Act, 1944 to levy and remit excise duty to the credit of the Central Government on self assessment basis. Failure to deposit central excise duty or short levy of duty or short payment of service tax will attract the payment of such duty along with the interest as prescribed by the Central Government now and then. Central Excise duty is assessed on the transaction value of the goods at the time removal of the same. What treatment should be given in case any revision of price in the price of the goods? Revision of price may lead to reduction in price or increase in price. This article discusses the treatment to be given in such situation and the liability of the assessee to pay the differential duty on differential price and interest, if any, and also penalty.

1. Introduction tax base of Goods and service tax (Gst) would be very wide and would comprehensively extend over all goods and services up to the final consumer point. the Gst would have two components:1. Central Goods and service tax

(CGst) – It would be levied by the Centre; and

2. state Goods and service tax (sGst) – It would be levied by a state.the basic features of law, e.g.

chargeability, definition of taxable event,

taxable person, taxable transaction, basis of classification, etc., would be uniform for both the CGst and the sGst, i.e. the basis of taxability would be same for both the CGst and the sGst, thereby wiping out all the disputes currently taken up by VAt/sales tax authorities and service tax authorities to tax a single transaction.

2. GST LegislationAfter carefully reading the Finance minister mr. pranab mukherjee’s budget speech of 2009-2010 and first discussion paper of the empowered

CA. Rajat Mohan (The author is a member of the Institute. He can be reached at [email protected].)

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Committee, we deduce that there would be one act for levy of central tax, i.e. CGst, and one act for levy of state tax in each state, i.e. sGst. therefore, there would be multiple tax statues in India for levy of one Gst. this could again bring same problems in the Gst tax structure that existed in the VAt tax structure.

3. Taxes That Would Be Foregonethe Gst would take place of all the major indirect taxes currently applicable in India. Central taxes that would be subsumed under the Gst:a) Central excise Duty – Levied under

excise Act,1944;b) Additional excise Duties – Levied

under excise Act,1944;c) excise Duty levied under the

medicinal and toiletries preparation Act – Levied under medicinal and toiletries preparation Act,1955;

d) service tax – Levied under Chapter V of Finance Act,1994;

e) Additional Customs Duty commonly known as Countervailing Duty –Levied under Customs Act,1962;

f) special Additional Duty of Customs – 4 per cent – Levied under Customs Act,1962;

g) surcharge – Levied under on any of above taxes or any other surcharges; and

h) Cess – Levied under on any of above taxes or any other surcharges.

After carefully reading the Finance Minister Mr. Pranab Mukherjee’s Budget

speech of 2009-2010 and first discussion paper of the Empowered Committee, we deduce that there would be one act for levy of central tax, i.e. CGST, and one act for levy of state tax in each state, i.e. SGST. Therefore, there would be multiple tax statues in India for levy of one GST.

Following state taxes and levies would be subsumed under the Gst:a) VAt – Levied by any state in India;b) sales tax – Levied under Central

sales tax Act, 1956;c) entertainment tax (unless it is

levied by the local bodies) – Levied by any state in India;

d) Luxury tax – Levied by any state in India;

e) taxes on lottery, betting and gambling – Levied by any state in India;

f) state Cesses and surcharges as far as they relate to supply of goods and services – Levied under on any of above taxes or any other cesses and surcharges; and

g) entry tax not in lieu of Octroi – Levied by any state in India.All the taxes listed above would

be consolidated under the new Gst regime thereby reducing compliance costs of taxpayers and administrative costs of the government. However, there are few other indirect taxes that may or may not be summed under the Gst regime as there is no consensus among states themselves or between the Centre and the states:1) purchase tax: states themselves

are of the opinion that purchase tax should be subsumed within the Gst framework and no exception should be given to any state to continue the levy of purchase tax. However, few states are getting substantial revenue from the purchase tax and, therefore, they are of the view that it should not be subsumed under the Gst. there is intra-state dispute on this issue. even the Centre is of the opinion that purchase tax is to be subsumed under Gst regime.

2) stamp Duty: It is recommended that the stamp duty would be phased out over a period of 3 years. Initially rate of stamp duty in all states should be restricted to 4 per cent. In year 2, stamp duty is to be reduced to 2

per cent and, finally, in the year 3, stamp duty should be completely wiped out and subsumed under the Gst regime.

3) Vehicle tax: the empowered Committee of the state Finance ministers is silent on the issue of inclusion or exclusion of the vehicle taxes levied by the state. However, the tax on vehicles levied by the state Governments could be subsumed in the Gst as recommended in the report of thirteenth Finance Commission.

4) electricity Duty: the empowered Committee is silent over the issue of inclusion or exclusion of the electricity duty. However, electricity duty levied by the state Governments could be subsumed in the Gst as recommended in the report of thirteenth Finance Commission.

4. Tax RatesUntil now, there has been no official announcement regarding the Gst rate for India. there are disputes among the state heads and Central Government regarding fixation of the Gst rate.Proposed rates of GST in various reports and news items

Particulars CGST SGST GST

Working Paper No.1/2009-DEA

12% 8% 20%

State Minister(mass goods)

- 8% - 9%

Task force implemen-tation report (Non-SIN Goods)

5% 7% 12%

RNR 5% 6% 11%

News update 8% 8% 16%

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In the current scenario, there is hardly any indication towards the proposed tax rates, however, the Gst can be expected to be around 16 per cent to 18 per cent.

5. Valuation the Gst would be levied on the value of goods and services transacted. Valuation provision would be common for both the CGst as well as the sGst. there is no specific information on this issue in any of the reports except that provisions would be simpler and more transparent.

6. Inter-State Transactionsthe Centre would levy inter-state Goods and service tax (IGst), which would be the CGst plus the sGst on all inter-state transactions of taxable goods and services. the inter-state sellers will pay the IGst on value addition after adjusting available credit of the IGst, the CGst, and the sGst on their purchases. Illustration:mr. A manufactures goods. He bought goods for rs. 56,000 and incurred expenses of rs. 74,000. these manufactured goods were sold inter-state at rs. 1,45,000 plus applicable Gst. rate of sGst and CGst is 7 per cent and 5 per cent respectively. Compute Gst payable.Solution:

Particulars Amount (R)

Cost of Goods 56000

Add: Expenses 74000

Add: Profit 15000

Sales 145000

IGST* 145000 @ 12% 17400

Sales Price 162400* IGST (12%) = CGST (5%) + SGST (7%)

7. Tax CreditCredit would be admissible in respect of both the

components of the Gst, i.e. the CGst and the sGst. the CGst and the sGst are to be treated separately for the purpose of tax credit. the scheme of tax credit would be:(a) taxes paid against the CGst shall be allowed to be

taken as input tax credit for the CGst and could be utilized only against the payment of the CGst.

(b) taxes paid against the sGst shall be allowed to be taken as input tax credit for the sGst and could be utilized only against the payment of the sGst. Cross utilization of input tax credit between the

CGst and the sGst would not be allowed except under the IGst model.

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consumption. the introduction of Gst will bring about a macroeconomic dividend by reducing what have been called the negative grey area dynamic effects of cascading taxation. the flawless Gst subsumes all indirect taxes on goods and services, which is the most elegant method of taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially sticks on final consumption within the taxing jurisdiction. so, following are the benefits of the Gst over the present Indirect tax system:1. economic Growth2. Uniform tax structure3. Lower and Combined single tax

rate4. Gain’s in GDp5. benefits to manufacturing sectors6. rise in exports7. poverty reduction8. better employment Opportunities9. reduced Cost of Housing

to conclude, the implications of a switch over to the flawless Gst as recommended by us are indeed far-reaching. every stakeholder stands to gain. the Gst has the potential to transform not only the tax system in the country but it also shows the way we organize and do business. n

Example: bAsICLet us understand the working of Gst on a manufactured commodity from point of view of a manufacturer, wholesaler, retailer, and final consumer assuming the Gst rate is 10 per cent:

Manufacturerthe manufacturer making value addition of R30 on his purchases worth R100 of input of goods and services used in the manufacturing process. the manufacturer will then pay net Gst of R3 after setting-off R10 as the Gst paid on his inputs, i.e. Input tax Credit, from the gross Gst of R13. the manufacturer sells the goods to the wholesaler. WholesalerWhen the wholesaler sells the same goods after making value addition of R20, he pays the net Gst of only R2 after setting-off of the Input tax Credit of R13 from the gross Gst of R15 to the manufacturer. RetailerWhen the retailer sells the same goods after a value addition of R10, he pays the net Gst of only R1, after setting-off R15 from his gross Gst of R16 paid to wholesaler.

thus, the manufacturer, wholesaler and retailer have to pay only R6 (i.e.

R3+R2+R1) as Gst on the value addition along the entire value chain from the producer to the retailer, after setting-off Gst paid at the earlier stages. that is to say, the final price paid by consumer is:R160 + 10% x 160 = R176.

8. Threshold8.a. As suggested in Empowered Committee Report

Turnover of GoodsApplicable Taxes

Below R10 lacNeither SGST nor CGST

Between R10 lac and R150 lac Only SGST

Above R150 lacBoth SGST and CGST

Turnover of Services Applicable Taxes

Below R10 lacNeither SGST nor CGST

Between R10 lac and RΒ Only SGST

Above RβBoth SGST and CGST

*Note: R β would be appropriately high, may be at or around R150 lac

8.b. As suggested in Task Force ReportTurnover of Goods Applicable Taxes

Below R10 lac Neither SGST nor CGST

Above R10 lac Both SGST and CGST

Turnover of Services Applicable Taxes

Below R10 lac Neither SGST nor CGST

Above R10 lac Both SGST and CGST

From the above discussion, we see and predict that task Force version of threshold limit is more logical and easy to manage. therefore, the proposed threshold limit for both the CGst and the sGst for goods as well as services would be R10 lac. However, taxpayers below the threshold limit may be allowed to register voluntarily.

9. Conclusionthe problem of the present distorted indirect tax system can be effectively addressed by shifting the tax burden from production and trade to final

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The introduction of GST will bring about a macroeconomic dividend by reducing

what have been called the negative grey area dynamic effects of cascading taxation. The flawless GST subsumes all indirect taxes on goods and services, which is the most elegant method of taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially sticks on final consumption within the taxing jurisdiction.

Stage of Supply Chain

Purchase Value of Input

ValueAddition

Value of supply

Rate Of GST

GST on output ITC Net GST = GST

on Output – ITC

Manufacturer 100 30 130 10% 13 10 13-10 = 3

Wholesaler 130 20 150 10% 15 13 15-13 = 2

Retailer 150 10 160 10% 16 15 16-15 = 1

States themselves are of the opinion that Purchase tax should be subsumed

within the GST framework and no exception should be given to any state to continue the levy of Purchase tax. However, few States are getting substantial revenue from the Purchase Tax and, therefore, they are of the view that it should not be subsumed under the GST.

MANAGEMENT


Leadership Approach and Attributes inStrategy Implementation in Indian Companies

In a fiercely competitive environment, leadership is the driving force to decide the future of an organisation. That is why it is a challenge to appoint the right person to run the organisation in the right direction. There are many companies that are known by their leadership style and value systems that contribute to organisational performance. Through a survey of 250 executives, the authors have found out that out of seven top crises identified, five are about leadership. Leadership is a difficult concept to explain, which is about emotions, morality, character and values. Nowadays, many companies have put in order their leadership philosophy like vision and mission statements and they have explained this philosophy to their employees as well. They believe that leadership drives a culture and a value system that has the ability to foster a motivational and innovative environment in organisations. Do you want to improve the quality of your organisation? Read on…

A survey was conducted and it was found out that a crisis of leadership was being experienced in our nation. In the survey, 250 executives were asked to rank the main crises facing us. 240 respondents named a lack of political leadership as the main crisis, followed by a crisis of leadership in all walks of life by 238, global warming as the next big crisis by 235, the crisis of faith in government by 230, corporate governance as the next biggest problem by 228, increasing corruption at all levels identified by 210 as the next big crisis and finally water crisis named by 204 as a problem of

large magnitude that needs to be addressed. Out of the seven crises identified, five were about leadership.

In a competitive environment, leadership becomes a driving force to decide the future of organizations, which is why it is a challenging task on their part to appoint the right people to lead them in the right direction. there are many companies that are known by their leadership style and values systems. Leadership is an important factor that contributes to the organizational performance. Leadership is one of the most difficult

Dr. S. K. Sharma, Dr. Sunil Giri, and Dr. A. K. Sharma (Dr. S. K. Sharma is a Professor and Head of the Department of Management Studies at The Technological Institute of Textile and Sciences, Bhiwani and Dr. A. K. Sharma is a Lecturer in the same Department. Dr. Sunil Giri is an Assistant Professor in the College of Management Studies, Shri Mata Vaishno Devi Univer-sity, Kakryal, Jammu & Kashmir. They may be reached at [email protected].)

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concepts to explain. It’s about emotions, morality, character and values. Nowadays, majority of companies have put in order their leadership philosophy like vision and mission, and made it clear to their employees. A prominent organization believes the leadership philosophy as one “that drives a culture and a value system that fosters an energetic, motivational and innovative environment succeed in building sustainable organizations. Leaders who walk the talk and base decisions on experiential learnings with a strong foresight make a big difference”.

While some believe that leaders are born not made, others believe that leadership can be learned. Leaders need to outline a vision – they should have the ability to look far into the future and should be able to project the direction of different trends. After setting the vision, leaders need to communicate it to every one in the organization with the zeal of an evangelist. Vision tends to get distorted as it is communicated through the ranks, therefore, it has to be commun-icated in such a manner that employees are enthused and energized to achieve, do their best and overtake others while doing so. Leaders must possess the following characteristics:• they need to be mentally and

physically fit. • they need to exhibit total integrity

– within themselves and with those around them and with their employers.

• they should have the courage to take challenges, to make choices, focus and prioritise.

• they should have the ability to take initiative. Initiative is not about being reckless; it’s about going with prudence.

• they should be a good listener and have an eye for detail.

• they should have enough confi-

Vision tends to get distorted as it is communicated

through the ranks, therefore, it has to be communicated in such a manner that employees are enthused and energized to achieve, do their best and overtake others while doing so.

dence that the people empowered have a detailed plan.

Strategy Implementation and Leadership strategy implementation is the sum total of the activities and choices required for the execution of a strategic plan. It is the process by which strategies and policies are put into action through the development of programmes, budgets and procedures. poor imple-mentation has been blamed for a number of strategic failures. majority of organisations failed due to poor leadership approach in strategy implementation. studies show that half of all acquisitions fail to achieve what is expected of them, and one out of four international ventures do not succeed. A study of the 700 largest mergers from 1996 to 1998 found that 83 per cent of the mergers failed to increase the acquirer’s shareholders value within a year of completing the merger. At this juncture, leadership plays a very prominent role.

Objective of the Studythe main objective of this study is to know the leadership approach and attributes in strategy implementation in Indian companies.

Sample Size and Profilethe present study provides a picture of the perceptions of 50 companies about the role of leadership in strategy implementation in term of their approach and attributes. Out of 50 companies 40, i.e. 80 per cent, companies have mentioned that product manufacturing is their main area of business whereas 5, i.e. 10 per cent, companies belong to the service sector. there are only 5, i.e. 10 per cent, companies who claimed for both the areas, i.e. manufacturing as well as service. majority of the companies, i.e. 24, are having turnover above R400 crore per annum. 17 companies out of

50 have shown their turnover in between R200 crore to R400 crore, whereas only 9 companies are covered under the category of below R200 crore; it shows the representation of medium- and large-size companies in the study. On the basis of corporate image as well as performance is concerned, the researcher has received the response from well-known companies of India including reliance Industries, Indian Oil Corporation, bharat Heavy electricals, bharat petroleum Corporation, etc.

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Participative style of leadership is collaborative and

democratic. Executives using this style engage others in the decision-making process. It’s great for building trust and consensus, especially when the team consists of highly competent individuals and when the leaders have limited knowledge or lack formal power and authority.

Leadership Styles and Organizational PerformanceIn excellent companies, leadership is not about recognizing a distinctive individual as leader. A group of individuals provides the energizing force. Leadership styles are patterns of behaviour, which leaders adopt in influencing the behaviour of their followers or subordinates in the organisational context. Spreier, Fontaine & Malloy identify six styles of leadership that managers and executives use to motivate, reward, direct and develop others: 1. Directive: this style entails

command and control behaviour that at times become coercive. When executives use this approach, they tell people what to do, when to do it and what will happen if they fail. It is appropriate in crises and when poor performers must be managed, but it eventually stifles creativity and initiative. High achievers under stress favor it.

2. Visionary: this style is autho-ritative. but rather than simply telling people what to do, leaders gain employee support by clearly expressing their challenges and responsibilities in the context of the organization’s overall direction and strategy. this makes goals clear,

increases employee commitment, and energies a team. people with a high-personalized power drive under low-stress situations and people with a high socialized-power driven when stress is high commonly use it.

3. Affiliative: Leaders with this style emphasise employees and their emotional needs over the job, and tend to avoid conflict. the approach is effective when managers are dealing with employees who are in the midst of personal crises or in high-stress situations such as layoffs. It is most effective when used in combination with visionary, participative, or coaching styles. It is seldom effective alone.

4. Participative: this style of leadership is collaborative and

democratic. executives using this style engage others in the decision-making process. It’s great for building trust and consensus, especially when the team consists of highly competent individuals and when the leader has limited knowledge or lack formal power and authority, such as within highly matrixes organizations. It is favored under high-stress conditions by leaders with high affiliation drives.

5. Pacesetting: this style involves leading by example and personal heroics. executives using this style typically have high standards and make sure those standards are met, even if they have to do the work themselves, which they frequently do. It can be effective temporarily and can demoralize employees over the long haul. It is a typical go-to style for high achievers, at least under relatively low-stress conditions.

6. Coaching: this style involves the executives in long-term professional development and mentoring of employees. It’s a powerful but underused approach that should be part of all leaders’ regular repertoire. Leaders who score high on the socialised-power motive prefer it under low-stress conditions.

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direction and make the things happened.

3. Leadership helps to motivate employees.

4. Organisations perform as per their inherent position in industry. Leaders help in getting the optimum performance.

5. Leadership can make efforts to develop teamwork to improve productivity and quality.

6. the knowledge and working style of leaders motivates the subordinates, increases the morale and creates a healthy work environment.

7. Good leaders can guide their teams well and teams can achieve goal easily.

8. Leaders co-ordinate/motivate/keep the bunch together/build teams/show light.

9. Leaders lead and finally achieve the organisational objectives.

10. Leadership provides right direction to employees motivating and energising people.

11. Growth, positive thinking, optimism coupled with reality in realistic assessment.

12. the quality of leadership affects the quality of the organisation.

13. Leadership sets examples, supports staff, guides, motivates and gives credit to implementers, supports in times of low performance.

14. Leadership determines the values to be pursued.

15. Leadership determines the success or failure of the organisational performance right in the beginning.

16. Leadership provides direction and motivates the team in implementing the strategy.

17. Decision-making is the role of leaders.

18. Leaders act as expert captains.19. Leaders evolve vision of the

organization and identify the right talents. to activate such vision,

Mr. N. R. Narayanan Murthy and Mr. Azim Premji may

be considered inspiring role models for their values and leadership styles. Majority of the respondents, i.e. 46 out of 50, claimed that they believe in participative leadership style whereas 4 respondents visualized the need of authoritarian leadership style. It was felt that the strategists must adopt the participative leadership style.

Leadership Style in Indian Companies: A Factual Picturesumantra Ghoshal, former professor of strategic Leadership at London business school, says: ‘Effective leaders intuitively understand people’s feelings and have the ability to shape and leverage those feelings to attain collective goals. They create and manage pride, fear, shame, anxiety, anger and other strong and weak feelings that move people to do things.’ mr. N. r. Narayanan murthy and mr. Azim premji may be considered inspiring role models for their values and leadership styles. majority of the respondents, i.e. 46 out of 50, claimed that they believe in participative leadership style whereas 4 respondents visualised the need of authoritarian leadership style. It was felt that the strategists must adopt the participative leadership style (see table I).

Table I: Adoption of Leadership Style

Leadership Style Number of Strategists

A. Authoritarian 04 (08%)

b. participative 46 (92%)

Total 50 (100%)

Source: Personal Survey

All respondents from the selected companies have acknowledged that the leadership affects the organisational performance and gave their comments on leadership:1. Leadership gives direction to

achieve the objectives. 2. Leadership leads to the right

leaders keep them trained and motivated. they should be capable to lead by example.

20. If leaders walk the talk, they build the trust.

21. Leaders should lead from the front.22. Leaders set direction to achieve

goals.23. Leaders become a driving force,

so that the combined efforts of all human resources achieve objectives.

24. Leadership gives direction and vision to the organisation.

25. Leaders have clarity in approach. 26. Leaders believe in team-building.27. Leaders’ commitment sets

the direction. If ever leaders’ commitment is perceived to be low, organisations start sinking.

28. Yes, leadership sets direction;

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good leaders carve plans for organisational growth and drive the organisation with their vision to achieve the strategy and goals.

29. Leadership means achieving target/goal in a systematic manner.

30. Leadership means motivating and controlling individual and team performance.

31. Leaders look top-down philosophy.32. Leaders lead by example, walk the

talk.33. Leaders are like the engine pulling

the train.34. Leaders affect overall organisation

culture.

Leadership Attributes at Strategy Implementation personality, influence, behaviour, motivation, culture and communication are the important attributes of leadership in terms of strategy implem-entation, ability of managers in an organisation. In the present study, it has been observed that behaviour is an important attribute and secured first rank with the weighted mean of 4.5 followed by personality, motivation, culture, influence and communication with the weighted means of 4.4, 3.7, 3.6, 2.6 and 2.1 respectively (see table II).

Table II: Leadership Attributes at Strategy Implementation

Attributes Frequency/Weighted Score on Scale basis VI to I Wtd. Mean

Rank

VI V IV III II I

behaviour 16x6=096 13x5=65 10x4=40 04x3=12 03x2=06 04x1=04 4.5 I

personality 21x6=126 05x5=25 05x4=20 08x3=24 05x2=10 03x1=03 4.4 II

motivation 06x6=036 08x5=40 13x4=52 09x3=27 12x2=24 ------------ 3.7 III

Culture 01x6=006 14x5=70 14x4=56 10x3=30 06x2=12 05x1=05 3.6 IV

Influence 04x6=024 05x5=25 04x4=16 06x3=18 13x2=26 15x1=15 2.6 V

Communication 02x6=012 02x5=10 01x4=04 11x3=33 10x2=20 21x1=21 2.1 VI

Source: Personal Survey

In the context of the results, it was the quite satisfying to take up this study because it mainly reflects the behavioural aspects. In this situation behaviour controls and input controls can be given due importance. a. Behaviour controls specify

how something is to be done through policies, rules, standard operating procedures and orders from superior. behaviour controls are most appropriate when performance results are hard to measure but the cause-effect connection between activities and results is clear.

b. Input controls focus on resources such as knowledge, skill, abilities, values and motives of employees. Input controls are most appropriate when output is difficult to be measured and there is no clear cause-effect relationship between behavior and performance. Leadership acts as a process of mobilising people. It is

said that the organization’s ability to mobilise thousands and millions of employees, and our trade partners and suppliers to execute its relentlessly and vigorously every minute and everywhere in the world is hugely challenging, i.e. where the role of leadership becomes more important.

Conclusionthe success and failure of any organization depend on the approach and attributes of leadership in the organization. the knowledge and working style of leaders motivates the subordinates, increases the morale and creates a healthy work environment. Leadership skills pro-mote the participation of employees in the decision-making process at different levels of organizations and help to inculcate skills of supervision and control in subordinates.n

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BANKING AND FINANCE


Reverse Mortgage Facilities in India — For Cash Poor–Home Rich Senior Citizens

There has been a limited academic debate on the prospects and problems attributable to reverse mortgage facility (RMF) in India. Still, there is a scope of improvement in the RMF market. The market may be developed and promoted, if all the constituents like governments, lenders and other intermediaries design and implement favourable policy guidelines. In view of low uptake of the product, this paper examines reverse mortgage as one of the ways of unlocking housing equity to supplement retirement income if any for cash poor elderly citizens and provides in-depth review and analysis of reverse mortgage programme in India. It briefly explains the salient features of Reverse Mortgage Scheme, 2008, and operational guidelines issued by the National Housing Bank. It also describes available home equity conversion product in India and abroad. Some of the suggested key policies like counselling have also been listed. An attempt has been made to enumerate emerging trends and forward-looking actions in RMF in this article.

About Reverse MortgageThe status of parents is that of a God as per the Indian culture. Even in the ancient Indian history, we come across sayings like Matrudeo Bhava, Pitrudeo Bhava, etc. The famous Shravankumar’s story which was stated in the Ramayana establishes this status. The Indian culture considers parents as the first teachers of their children. The foundation of their life is built by them. so, it should be the moral duty

of children to look after their parents and support their needs. In joint-family system, all members are cared for by the family itself. but nowadays, the concept of a joint family is collapsing. because of industrialisation, money-mindedness and an increase in market prices, children have started neglecting their parents. They have no time to look after their parents because of their busy schedule. besides, there are many elderly childless couples. some

CA. Ashok K. Malhotra(The author is a member of the Institute. He can be reached at [email protected].)

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of these elderly people have cash poor - home rich status. Consequently, under the maintenance and Welfare of parents and senior Citizens Act, 2007, the Central and state Governments have been empowered to implement various programmes for the betterment of the senior citizens.

The main objective of old age security programmes is to ensure the financial independence and dignity of the senior citizens of India. In addition to this Act, financial programmes were announced to achieve old age security. Two such schemes are the reverse mortgage facility and the new pension scheme. It has been over two years since a contemporary product reverse mortgage facility (RmF) was announced by the Hon’ble Finance minister of India in his budget speech in 2007-08. As per the speech, some of the reputed organisations may introduce reverse mortgage facility under which house-owner senior citizens can avail of finance against the mortgage of their house equity, while still occupying and staying in the house. RmF in India is still in an infancy stage. It is yet to gain significant acceptance by senior citizens.

Reverse mortgage facilities are home-loan products designed for senior citizens of over 60 years of age by converting their home equity into liquid form. It is a way of getting the benefits of the home equity by retaining the home ownership and also without having to make any repayments. The borrowers, especially after retirement will definitely find the RmF a useful financial product that provides them financial independence. In case of married couples, at least one of them should be above 60 years in a joint borrowing to avail of this product. Normally, loan is offered for a maximum period of 20 years. There are no income qualifications to avail RmF unlike regular mortgages as borrowers are not required to repay outstanding

loan. The lender, besides scrutinising the property papers, ensures that the borrowers pay all the taxes and charges towards the property regularly. The property is free from any encumbrance and is maintained in the saleable condition with adequate insurance cover against fire and other perils.

There has been a limited academic debate on the prospects and problems attributable to the RmF in India. Nevertheless, there is a great scope of improvement in its market. Its market can only be developed and patronised, if all the constituents like governments, lenders and other intermediaries design and implement favourable policy guidelines. We will examine reverse mortgage as one of the ways of unlocking housing equity to supplement retirement income for cash poor elderly citizens and provides an in-depth review and analysis of the programme in India.

Design and Features of Various Reverse Mortgage FacilitiesCentral Government, in the exercise of powers conferred by the Clause (xvi) of the section 47 of the Income-tax Act, 1961, has come out with the Notification No. 93/2008, dated september 30, 2008, with a scheme, i.e. Reverse mortgage scheme, 2008, which came into effect from April 1, 2008. Currently, under the scheme, the National Housing bank established under the section 3 of the National Housing

bank Act, 1987, any scheduled bank included in the second schedule to the Reserve bank of India Act, 1934, or a housing finance company registered with the National Housing bank will be the approved lending institute. The borrower under the scheme is known as reverse mortgagor. The disbursement of loan to eligible reverse mortgagor can be in any of the following modes:(I) periodic payments to be decided

mutually between the approved lending institution and the reverse mortgagor

(II) Lump sum payment in one or more trenches to the extent that the aggregate of the amount disbursed as lump sum payments do not exceed 50 per cent of the total loan amount sanctioned

(III) Committed line of credit with an availability period agreed upon mutually to be drawn down by the borrowerThe tenure of the loan shall not

be beyond 20 years from the date of signing the agreement by the borrower and the approved lending institution. The reverse mortgagors or their legal heirs or estate shall be liable for repayment of the principal amount of loan along with the interest to the approved lending institution at the time of foreclosure of the loan agreement.

In Us, there are three types of reverse mortgages: federally insured, lender insured and uninsured. moreover, three distinct products are - Home Equity Conversion mortgage (HECm), Fannie mae Home Keeper Reverse mortgage and Cash Account. These products differ according to the residential property to be mortgaged, payment types, loan amount, processing fees and interest on the loan balance. Another variation in the product can be the payment of annual accrued interest once in a year based on the convenience of the borrower.

National Housing bank, a subsidiary of the Reserve bank of India (RbI) has

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Reverse mortgage facilities are home-loan products

designed for senior citizens of over 60 years of age by converting their home equity into liquid form. It is a way of getting the benefits of the home equity by retaining the home ownership and also without having to make any repayments.

BANKING AND FINANCE


also announced operational guidelines for granting of the RmF. The guidelines are applicable to the housing finance companies registered with the NHb within the overall framework of the RmF. primary lending institutes have the discretion to place suitable safeguards keeping into view the inherent risks. One of the eligibility criteria under the scheme is that the title of the residential property to be mortgaged should be free from encumbrances and mortgagor should have a clear title or ownership. This criterion is vague as it is left to the discretion of primary lending institutions (pLIs) to decide the extent of existing loan which under the normal mortgage will be treated as free from encumbrances. moreover, most of the residential houses sold earlier by government bodies like the DDA or the GDA are on a 90-year lease. It has not been made clear in the guidelines as to whether senior citizens owning such residential properties are eligible prospects under the RmF.

The maximum amount of loan that can be approved depends on the market value, age of the youngest borrower and the prevalent interest rate. However, the pLIs will have to apply prudence to determine the loan quantum reckoning the no-negative-equity guarantee being provided by the pLIs. The pLIs may consider ensuring that the equity to value ratio does not at any time during the tenor of the loan fall below 10 per cent and considering revaluing the property mortgaged at least once every five years. The quantum of loan may undergo revisions based on such re-valuation of property at the discretion of the lender. The RmF can not be used for speculative, trading and business purposes. However, the document has provided a list of end use of funds as per the NHb guidelines which are:(I) Upgradation, renovation and

extension of residential property(II) For uses associated with home

improvement, maintenance/insurance of residential property

(III) medical, emergency expenditure for maintenance of family

(IV) For supplementing pension/other income

(V) Repayment of an existing loan taken for the residential property to be mortgaged

(VI) meeting any other genuine needCounselling consideration for

such a complex financial product is to be taken up seriously. The senior citizens should be treated more fairly in explaining important terms of the agreement. For example, the lenders must clarify the implication of fixed and floating rate of interest in a transparent manner, upfront to the borrowers. similarly, the methodology of the revaluation process of mortgaged property and the frequency/schedule of such revaluations should be clearly specified to the borrowers upfront. As a customer-friendly gesture and in keeping with international best practices, after the documents have been executed and loan transaction finalised, the borrowers may be given at least three business days to cancel the transaction under the right of rescission clause. besides, the rationale behind the decision of mode of payment and fixation of the loan tenure shall be clearly disclosed to the borrowers. A detailed schedule of verification charges of external firms,

title examination fees, legal charges, stamp duty and registration charges, property survey and valuation charges should be specified and provided to the prospective borrowers upfront by the lenders without any ambiguity. The lenders are required to observe and maintain high standards of conduct in dealing with senior citizens and their families and to treat them with special care. The borrowers may be suggested to nominate their personal representatives usually a close relative. most of the code of conducts should be observed pre & post finalisation of the loan agreement.

There are many income-generating competing products consuming home equity in the markets. They include the reverse mortgage (Rm), subletting, downsizing and lease buyback scheme (Lbs). since acceptability of any innovative financial product takes time and in order to make it viable, focused attention is required. Lenders, borrowers, intermediaries and even the regulators may not understand completely the implications or risks associated with it because of lack of data and experience in handling these products. That is the reason why conventional financial products are adopted without much resistance by the investors and the borrowers. Over a period of time, different variations of financial products have been evolved wherein home equity can be converted in to liquid forms that are suitable to borrowers. some such schemes are not offered in India. such schemes are available in advanced countries: 1. Sale and lease back of residential

property: The homeowner sells the house but keeps the right to live in the house till the time that it is his prime residence. The amount could be used for home improvement or a health need, etc. The investor’s return is the periodic lease money.

2. Interest-only Mortgage: The borrower takes lump sum amount

National Housing Bank, a subsidiary of the RBI has

also announced operational guidelines for granting of the RMF. The guidelines are applicable to the housing finance companies registered with the NHB within the overall framework of the RMF. Primary lending institutes have the discretion to place suitable safeguards keeping into view the inherent risks.

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Lenders, borrowers, intermediaries and even the regulators

may not understand completely the implications or risk associated with it because of the lack of data and experience in handling these products. That is the reason why conventional financial products are adopted without much resistance by the investors and the borrowers.

and pays only interest during his lifetime. The principal is recovered at the time of sale from the proceeds of the home.

3. Mortgage Annuity: The loan against the mortgage is used to purchase an annuity for the homeowner. The advantage is that even if the homeowner moves out of the home, the annuity will continue till his death.

4. Shared Appreciation Mortgages provide interest free loan or loan at a very low rate with no repayment date. The lender gets a pre-agreed share in any appreciation in the property value over the accumulated value of the loan at the time of sale or death of the borrower, but does not share any decline in value. shared Equity mortgages (sEms) are similar in effect to housing partnerships. sEms are occasionally arranged among family members and sometimes with third party investors. With sEms, there are three parties to the mortgage contract, the homeowner, an investor, and a mortgage lender. In effect, both the homeowner and the investor buy shares in the property. In some cases the investor and mortgage lender may be the same.In developed countries like UsA,

Europe and Australia, there are also some private reverse mortgages that are not insured by the government, e.g.

the Home Keeper for Home purchase program recently begun by Fannie mae under which the homeowner’s price risk is shared with other investors.

In nutshell, the multiple reverse mortgage products are offered with similar structural features. There are different costs involved with various degree of flexibility:

Risks Associated with Various Reverse Mortgage FacilitiesThere are diversifiable and non-diversifiable risks in RmF transactions. As noted above, borrower longevity, interest rates and future property values are the primary sources of collateral risk for the reverse mortgage lender. Diversifiable risks, based on the law of large numbers, can be pooled and managed through insurance. so far, there is no insurance product in India to cover longevity risk completely. This is managed by the lender to a limited extent.

Longevity: The lenders have to evaluate the risk of the individuals outliving the agreement of reverse mortgage, as the borrowers are not required to vacate the house. Only the annuity payments will stop. This is one of the scenarios in the decision-making process for the lenders. As stated above, longevity as a risk can be managed through insurance. This is one of the reasons for not having life-time annuity product in India under the reverse mortgage scheme. Central bank of India has signed up a strategic alliance with star Union Dai-ichi Life Insurance for a life-long annuity. One of the problems attributed to longevity risk is that of adverse selection of the borrowers. Adverse selection is a problem of asymmetric information. Normally, life insurance contracts take care of the risk of adverse selection by medical examination carried out on the individuals. Reverse mortgage Facilities are primarily meant for old

age security. The problem of adverse selection can not be completely mitigated as there is no provision of medical examination in the scheme. Longevity risk is to be managed by the lenders in collaboration with insurance companies who have knowledge and experience in dealing with the risk.

Interest Rates: The lenders of RmF are responsible for managing non-diversifiable interest rate risk that is appearing on the balance sheet, by adopting Asset-Liabilities matching techniques. most of the lenders normally manage interest risks in two ways. If the RmL is at fixed rate facilities, the lenders may incorporate interest rate reset clause in the reverse mortgage documents. A reset clause permits banks to review rates at the end of certain number of years. The lenders should formulate the Reset Clause policy as the policy depends on the quantum and tenure of the loan as well as on shape and level of the interest yield curve. The implications of the reset clause are shared with the borrowers. Effectively, this makes the fixed rate loans equivalent to floating rate ones. The guidelines on the subject published by the Corporation bank cover both fixed and floating rate of interest. In either case, it is not beneficial to the borrower, hence the risk. The second way to manage the risk is to reduce the loan commitment or annuity amount. Alternatively, loan margin can be adjusted in such a manner that the impact of interest rate risk on the outstanding loan is reduced. Nevertheless, the NHb, in order to promote the RmF, should absorb losses in extreme cases eventually. As such, the insurers of reverse mortgages are partially hedged from interest rate risk by the security interest that the lenders have in the property. The insurers are hedged to the extent that property appreciation is positively correlated with interest rate changes.

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Property Value: Value of the property is exposed to two kinds of risks. Diversifiable risk can be considered through large number of mortgage cases. but non-diversifiable risks like economy recession at the national level can be mitigated through reinsurance. Variation of individual property values around the average, or expected value increases over time. In other words, the likely error of estimation of the property value is greater if the period of prediction is longer.

Aforementioned risks are being managed in developed countries mainly through insurance and with the terms of the agreement with borrowers. The viability of managing risk through insurance may not be feasible as of now in India for the simple reason that the number of reverse mortgage borrowers is limited and pooling of the risk may not be adequate to sustain insurance business. We examine how far the risks borne by the lenders in India are managed through different techniques. The pLIs are able to minimize the risks in the RmF transactions by adopting the following techniques:(I) pLIs compute eligible amount by

an overall cap of loan amount. (II) pLIs estimate the loan to value

ratio in such a way that there is no negative equity guarantee.

(III) Equity to value ratio is always greater than 10 per cent during the tenor of the loan in the RmF.

(IV) The maximum lump-sum payment is restricted to 50 per cent of the total eligible amount of loan subject to a cap of R15 lakh.

(V) The borrowers do not have the discretion to use funds beyond the specified applications.

Moral Hazard in Reverse MortgageAgency Issue: The valuation of the residential property is required to be done at such frequency and intervals as decided by the pLIs, which in any

case shall be at least once every five years. The pLIs shall determine the market value of the residential property through their external/in-house valuers. Also, there will be agency problems in getting appraisers to give unbiased appraisals when they know that their appraisal feeds directly to a disadvantage for the homeowners. but these appraisals of the real value of a home are subject to substantial errors, 10 per cent, 20 per cent, or, even more are quite common.

Renovation and Maintenance of the Property: In most of the reverse mortgage transactions, the owners’ equity in percentage terms gradually keeps on reducing over time unless the rate of appreciation in value is higher. There is no incentive to maintain the house properly after the owners’ home equity is reduced below, say, 10 per cent. To overcome this category of moral hazard, the RmL may be foreclosed as per the guidelines of the NHb. Alternatively, the primary lending institute may reserve the option to pay for insurance premium, taxes or repairs by reducing the eligible loan advances and using the difference to meet the obligations/expenditures. In practice, it may be very difficult to enforce such contract provisions.

Reverse mortgage borrowers may undertake upgradation, renovation and extension of residential property in such a manner that has deteriorated the value of the house. The borrowers will undertake only those improvements, the lack of which causes a lot of inconvenience. Consider a case, a borrower constructs a balcony in an unconventional manner to get sun during winter and the value of the property may go down. Another source of moral hazard on the part of the borrowers is to utilise loan amount for a purpose where the legitimacy is debatable. subjectivity about the genuineness of expenditure can not be ruled out. This may have an effect on the interest of the lenders.

Off-the-Contract Transactions: Instead of renovation or proper maintenance, the owners have incentive to sell the expensive branded electrical and sanitary fittings of the property with the intention to replace the same with cheaper ones. such an off-the-contract deal may not even come to the knowledge of the official valuators. Likewise, the evidence of subletting of the property during the tenure of the loan is most difficult task to establish by the lenders.

Demand Side of RMFThe NHb, the regulator for home finance institutions in India, has estimated home finance to grow to nearly $100 billion ( R4.52 lakh crore) by 2015 from the current $39 billion. The Registrar General of India forecasts the share of senior citizens (age 60 years and above) in the total population to rise from 6.9 per cent in 2001 to 12.4 per cent in 2026. According to Reverse Mortgage Market: Early Days for India report released by a boston-based consulting firm for financial institutions, the current market size for reverse mortgage of 3 million homesteads is expected to grow to 6 million by 2015.

Unfortunately, only 5700 have availed of the reverse mortgage scheme. This can be gauged from the fact that 20 home lenders together

Central Bank of India has signed up a strategic alliance with

Star Union Dai-ichi Life Insurance for a life-long annuity. One of the problems attributed to longevity risk is that of adverse selection of the borrowers. Adverse selection is a problem of asymmetric information. Normally, life insurance contracts take care of the risk of adverse selection by medical examination carried out on the individuals.

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have disbursed only around R1050 crore worth of loans up to December 2008, since the scheme was launched. The poor response on the demand side is because of a number of reasons. First, unlike UsA, Europe, or, Australia, where reverse mortgage facilities are very much understood and welcomed as a product, awareness and understanding of the product in India is less and complex in nature. people in India have to really work hard to buy or construct their own house. because of difficulty in having one’s dream home there is a very strong bonding between owner and their property. They avoid the RmF as they can not move out the current house for more then one year. As per the guidelines, the borrowers or co-borrowers cannot move out of the house for more than one year continuously. If they move out of house, the loan dues are to be settled immediately. senior people like to go and stay with their children for long periods especially if the children live overseas. moreover, there is a social stigma attached to a home mortgaged. We may rename the product other than RmF.

Another very important reason for lukewarm response to the RmF is the saving habits of Indians in general. many Indians retire with sufficient funds to lead a comfortable life after retirement. Despite the fact that the system of nuclear family is evolving in urban regions, bonding amongst family members is so strong that senior citizens who are not able to amass significant wealth, are taken care of by other members of the family. There may be reason for low demand if the potential borrowers have powerful bequest motives.

basically, the psyche of the Indian does not make them comfortable with the very idea of selling their home. On the other hand, there are people who would like to stay put in their own home. Once they enter in to a reverse

mortgage transaction, it would be quite difficult to move out and shift to a new and better house. One may understand the insight on the demand by studying the actual trend of mobility of home owners. The awareness drive may be necessary especially for senior citizens without any heir, who suffer due to low level of consumptions during their later part of life. The means for bringing awareness about the benefits of the RmF to people are negligible. some bankers are of the opinion that, at this stage, the RmF is not very compatible with the social environment of India. Even if senior citizens apply for an RmF, their sons/daughters may come forward and convince them to withdraw their application as, in the Indian society, children (especially sons) are supposed to take care of their old parents. Also, a tradition of keeping the property for children free from any encumbrance in addition to unclear laws and regulations relating to reverse mortgage are the stumbling block for the market to pick up. The idea of taking over the possession of the home by the bank or the insurance at the end of the contract does not gel in the minds of the borrowers.

Current Market Status mainly, the RmFs providers are the

banks and housing finance companies in India. The implications of the scheme and the operational guidelines have not been well understood by the other lenders yet. NHb has already held one round of meeting with insurance companies including Life Insurance Corporation of India to design an annuity product so that the funds can be invested and a monthly income is obtained for the borrowers. With the limited number of borrowers, quantum of loan sanctioned and disbursed are not quite satisfactory. The scheme has been adopted by 23 scheduled banks and two housing finance companies in the country. Except the Central bank of India, other pLIs have not shown any significance initiative to promote or patronise the RmF.

The Central bank of India has tied up with star Union Dai-ichi Life Insurance to launch a unique product that assures life-time annuity for senior citizens opting for an RmF. In December 2009, the improved version CENT Swabhiman Plus was launched. One of the improvements is the availability of lifetime regular income as against the maximum of 20 years in the existing reverse mortgage loans offered by various banks. It is estimated annual business of R30-40 crore. This is a good model wherein insurance companies are also participating in the business of reverse mortgage. many more life insurance companies may have strategic alliances with housing finance institutions and banks. This is the first time in the country that an annuity product assuming life-time payments is being made available to senior citizens under reverse mortgage loans. senior citizens are likely to get higher monthly payments as the star Union Dai-ichi Life Insurance Company will be in a better position to assess life risk and provide better terms through annuities.

broadly speaking, the response of the banks has not been satisfactory

Reverse Mortgage borrowers may undertake

upgradation, renovation and extension of residential property in such a manner that has deteriorated the value of the house. The borrowers will undertake only those improvements, the lack of which causes a lot of inconvenience. Consider a case, a borrower constructs a balcony in an unconventional manner to get sun during winter and the value of the property may go down.

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to the potential customers when they visited the branch to inquire about the product. The staffs are not in a position to clarify some of the doubts that a prospect may ask relating to an RmF. The lenders should have in-depth knowledge about the product. In the absence of understanding about the product, customers can not be convinced to go for the scheme. Clearly, a lack of understanding of lenders about the importance of training their staffs is a matter of concern.

Government & NHB Initiatives

With effect from April 1, 2008, as per the section 47(xvi) of the Income-tax Act, 1961, any transfer of a capital asset in a transaction of reverse mortgage under the announced scheme will not be regarded as transfer for the purpose of capital gain tax. Another issue as to the loan received, either in lump sum or in instalments, under a reverse mortgage scheme has been addressed under the Income-tax Act. The amount received under the scheme by the borrower is not treated as income under the section 10(43). However, currently annuity payment for life time is taxable. The government should discontinue tax on an annuity under reverse mortgage-backed annuity schemes.

The provisions of Transfer of property Act, 1982, Registration Act, 1908 and stamp Duty Act are applied when absolute ownership in the property is transferred to a lender or to a prospective purchaser at the time of the death of the borrower and the co-borrower.

However, there is no direct implication on the borrowers.

As stated earlier, senior citizens are to be treated with special care. pLIs should go extra mile to explain fine points of the RmF. In reverse mortgage facilities, great deal of counselling is needed. A positive step has been taken by a non-profit organisation registered under the societies’ Registration Act of 1860, and National Housing bank jointly with an opening of counselling centres in Delhi, Hyderabad, Kolkata and Chandigarh and a training of their staffs to provide details about the scheme of reverse mortgage. Another admirable initiative taken by Consumers Association of India (CAI) in association with the NHb is the commencement of a counselling centre in Chennai in April 2009.

The NHb should plan a dedicated fund to refinance reverse mortgage loans provided by the pLIs. It may issue a secondary market product by offering bonds to public in reverse mortgage market. The investors of such bonds should get exemption under the section 80 C of the Income-tax Act, 1961. With this proposition, confidence level of the market players will get heightened. The market for reverse mortgage should be augmented with support of the Central and state Governments as the social security program is inadequate in the country. A recent World bank study found that only 10 per cent of the population had any sort of social coverage. since there no effective social security scheme in India, it is necessary to refinance the RmL to promote the financial product.

In the Union budget 2007-08, the announcement of the introduction of mortgage guarantee companies was a welcome step in the right direction. such a move is all the more important as the guarantee firm will enhance comfort level to the pLIs. It is recommended to form a joint venture with any reputed risk guarantee company. The NHb may seek equity participation from the World bank and the Asian Development bank. World bank has been promoting projects for development of the RmF. In 2002, the World bank undertook a housing project in Latvia. One of the project’s objectives was to provide guarantees to financial institutions that issue reverse mortgage loans to the elderly for home improvements. Like in the UsA, the Central Government should sponsor reverse mortgage program by announcing pilot program wherein at least first 5000 RmLs should be provided by the National Housing bank. With the pilot program, the risk of lenders and mortgagees will have to be absorbed ultimately by the government. A suitable budgetary support is to be provided by the government. promoting the pilot project bring about awareness in general and boost confidence of the elderly, as it displays commitment of the government in the RmF scheme. The joint venture may also scale up overall increase the size of the market as with guarantee features bank may be able to offer the RmF at a lower interest.

The NHb has launched a new reverse mortgage loan-enabled annuity (RmLEA) scheme in December 2009. As per the scheme, borrowers may opt for an annuity for a lifetime, compared with 20 years cap on the old scheme. The bank has already approached the state Governments to sponsor insurance schemes to expand the scheme to people who are covered under the government’s housing projects.

…unlike USA, Europe, or, Australia, where reverse

mortgage facilities are very much understood and welcomed as a product, awareness and understanding of the product in India is less and complex in nature. People in India have to really work hard to buy or construct their own house. Because of difficulty in having one’s dream home there is a very strong bonding between owner and their property.

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Emerging Trends 1. The role of counsellor should not

be underestimated. Extensive explanatory and advisory work should be carried out by the government to provide the necessary counselling to the elderly in understanding the scheme. There is a need and desire to develop policy guidelines for a much broader and deeper public-private partnership (ppp) in the area of counseling. It generates interest, willingness and understanding about RmF in lending institutions and encourages them to adopt new approaches to RmF. Counseling to the borrowers is another area that requires additional efforts. The scope of ppp can be increased to cover many functional area such as:• Offeringcertificateprogramme

for training to the prospective counselors by b-schools

• Consideringpossibilityofusingoffice premises of non-profit organisation as the counseling centre

• Utilising resident welfareassociations as important vehicles for counseling as they are in better position to discuss features and benefits of the RmF in community gatherings and lenders can also seek help of resident welfare associations to bring about awareness about RmF

2. As per the present guidelines, RmF

is available for a maximum period of 20 years. market for Rm loans can be developed, if life insurance companies start providing annuity payment beyond 20 years. The product becomes attractive and is comparable with international product. The NHb has been talking to insurance companies on providing annuities on reverse mortgage. The Rm products are quite popular in the developed countries, wherein the senior citizens are able to earn income from their property till death.

3. The NHb should propose to the government to create appropriate institutional framework to design and promote measures like guarantee support schemes wherein adverse movement of the property value is protected and guaranteed. Likewise, the NHb is working on title indemnity, wherein lenders and buyers get protection against defective titles.

4. most of the reverse mortgage contracts are of long duration loans funded by banks in India. The banks are not encouraged to go ahead with the RmF because of possibilities of asset-liability mismatch in the balance sheet. The RbI should come out with take-out financing scheme. It is a method of providing finance for longer duration reverse mortgage loans by banks by sanctioning medium term loans. Under the scheme, the loan will be taken out of books of the financing bank within pre-fixed period by another institution thus preventing any possible asset-liability mismatch. After taking out the loans from the banks, the institution could offload them to another bank or keep it. The scheme needs to be designed very carefully in view of complexity of an RmF especially considering the issues of risks, pricing of product, etc.

5. Though it has been made quite clear in the guidelines that pLIs will not earn profit from the closing cost of the agreement and the costs should be collected from the borrowers rather than adjusting the same from eligible agreed amount. This may be suggested that cash strain on account of the cost on the part of the borrowers can be removed if the costs are adjusted from the loan amount instead of collecting them.

6. Real estate agents are completely unorganised sector in India. Their public image is not very encouraging and the quality of their service is non-satisfactory, as there is no control on their shady transactions. In order to change this, the state Governments should bring about a Code of Conduct for the real estate agents. If this works out effectively, real estate agents may effectively promote the RmF as they operate in an around the residential colonies.

7. The provisions of Transfer of property Act, 1982, Registration Act 1908 and stamp Duty Act should be amended to incorporate treatment of reverse mortgage transactions at the time of loan and at the time of termination of contract. n

With the limited number of borrowers, quantum of loan

sanctioned and disbursed are not quite satisfactory. The scheme has been adopted by 23 scheduled banks and two housing finance companies in the country. Except the Central Bank of India, other PLIs have not shown any significance initiative to promote or patronise the RMF.

The NHB has launched a new reverse mortgage

loan-enabled annuity (RMLEA) scheme in December 2009. As per the scheme, borrowers may opt for an annuity for a lifetime, compared with 20 years cap on the old scheme. The bank has already approached the State Governments to sponsor insurance schemes to expand the scheme to people who are covered under the government’s housing projects.

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How to Manage Our Money: An Introduction to Personal Financial Planning

Personal financial planning tells us how to manage our money properly to fulfill our financial goals. This article, written in common-man diction, focuses on financial planning needs and requirements for common people. The objective of this article is to spread financial literacy and discipline among the common man, without going in to too much technical aspects of the subject. This subject seems to be a matter of general knowledge, but actually it is a specialised science and a matter of art. It is actively practised by hundreds of chartered accountant professionals across the world. It provides lot of professional opportunities to them in both urban as well as mufassil areas. Hence, there is a need to popularise this area of practice in the CA community. Read on:

Introduction to PlanningOur wants are unlimited. but money is limited. so, every one needs to know, how to use limited money to fulfill unlimited wants. subject of this article is “how to manage our money”, technically called, “personal financial planning”.

Our elders described three types of persons:1. Yogi means a saint with attitude of

simple living and high thinking like buddha and Gandhiji had. And, it is not possible for everyone to have that.

2. Bhogi means a common and earthly person who uses money properly and leads a satisfied life on this earth. And, we have to aim at that.

3. Rogi means a financially sick and undisciplined person who does not use money properly. And, hence, she/he faces various financial problems like not achieving her/his goals, failing in her/his responsibilities and finally becoming insolvent. Even recent recession in the UsA is due to mismanagement of money. We can avoid all these, by proper planning.personal financial planning tells us

how to manage our money properly to fulfill our financial goals. It is not just selling financial products such as insurance policies, postal saving schemes and mutual funds. similar to our physical health, our financial health is also important. personal financial

CA. Sangameshwar C. Shirol(The author is a member of the Institute. He can be reached at [email protected])

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planner is our financial health doctor. Hence, we have to obtain, good and honest advice from personal financial planner, to be financially healthy. We also need professional help in this planning process, as lot of calculations are involved in it. When we build a house, we first prepare a plan, a map, or, a blueprint. similarly, when we earn, spend, save and invest, we have to first prepare a plan or a roadmap. Random approach towards our finance cannot take care of all our financial goals. personal financial planning covers lot of topics such as: Introduction to planning, planning process, Wants and Goals, Income, Taxation, Allocation of Income, spending and saving, Loan, Insurance, Emergency Fund, Investment, Cash, bank savings Account, Gold, Real Estate, Debt, Equity, shares, mutual Funds, Own business or profession, Debt-Equity Ratio, Willingness to Take Risk, Ability to Take Risk, Asset Allocation, and Utilisation of Funds and Inheritance.

Let us discuss each of the above topics in little detail to have a general idea of the subject while keeping in view the needs and requirements of a common man.

Planning ProcessThe process of personal financial planning, involves the following steps:1. Collecting and analyzing the

information on our needs and goals, income and expense, and assets and liabilities

2. selecting the goals based on our needs and priorities, which are within our budget

3. Deciding our allocation of income towards various goals

4. Deciding our debt-equity ratio, after assessing our risk profile based on our willingness to take risk and ability to take risk

5. Deciding our investments and assets as per our asset allocation

6. preparing a detailed plan or

budget and cash-flow statements of our personal finance similar to any other business project

7. Implementing and monitoring the plan and revising the plan, if necessaryWe have to start personal financial

planning as early as possible. We can have proper planning to achieve all our financial goals, only if we have sufficient time to earn, save and invest and time to take risk. The best is to start planning as soon as we start earning. This planning is for the purpose and benefit of all our family members. Hence, we have to involve all our family members in this planning process. It cannot be achieved without their cooperation.

personal financial planning differs from person to person, according to his needs, goals, income, budget, risk profile and detailed breakups required by him. Hence separate customised personal financial planning is to be done for each person separately, only after one-to-one discussion as per the above planning process. but in this article, we try to study this subject in general taking an example of a common man.

Wants and GoalsThe first step in personal financial planning is selecting the goals out of our unlimited wants. money is only a means to achieve our financial goals. Just accumulating money would not serve any purpose. Hence, we should

have some goals to achieve. These goals will motivate us to work further.

First, list all our needs and financial goals in consultation with all our family members that we want to achieve in our life. Find out when and in how many installments and how much money required for each goal taking into account the average inflation. Finally, select the goals, again, in consultation with all our family members based on our needs and priorities, which are within our budget. Classify and further breakup the selected goals in to present expenses, future expenses (medium-term and long-term goals) and owning assets. Let us assume the financial goals of a common man as follows:[A] Present expenses:1. Domestic expenses2. Insurance premiums3. Emergency fund[B] Future expenses:1. medium-term goals that are less

than 10 years far away: children’s education, marriage and purchase of vehicle.

2. Long-term goals that are more than 10 years far away: self-retirement pension fund and tour and travel after retirement.

[C] Owning assets:1. Gold for personal use and

children’s marriage2. Owning real estate such as house,

shop, office, etc., for personal useWe can have further detailed

breakups of each of the above financial goals for detailed planning. Our basic needs and goals are actually limited, and can be achieved by thorough planning. but, we have to accept that luxuries are unlimited and all of them cannot be fulfilled. Therefore, let us not compare ourselves with others. This change in possessions is not to be ashamed of, till we live independently. The aim must be to lead an independent, dignified, satisfied and peaceful life and not to show off.

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We can have proper planning to achieve all our financial goals,

only if we have sufficient time to earn, save and invest and time to take risk. The best is to start planning as soon as we start earning. This planning is for the purpose and benefit of all our family members. Hence, we have to involve all our family members in this planning process.

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so it is said: Live within your means. Our elders say: stretch your legs as far as the bed is and be satisfied with what you have. Greed is the root cause of sorrow. Once we decide our goals, we should not divert frequently. Always be focused to achieve the decided goals and start working on them.

IncomeTo achieve our financial goals, we require an income. Naturally, more the income, easier is the planning. Do not be satisfied that we already have lot of inherited property and need not work. It is said: Easy money will not last long. It is said, if we don’t earn, no matter how much wealth we have is insufficient. so, we have to earn to know the value of money and to understand to manage it carefully.

Hence, earn honesty as much as possible during our productive age. because:1. studying and starting earning itself

takes about first 30 years of our life2. Then if we assume to work up to

60 years of our age, our productive period will be 30 years only

3. And if we assume to live up to 90 years of our age, our retired life will be another 30 years.Hence, our retired life is almost equal

to our productive years. so, we need huge retirement fund, to maintain the same standard of living throughout our life. It is almost equal to total domestic expense that we make during our entire productive period. It means for every rupee that we spend now as domestic expense an equal amount is to be kept aside now in self-retirement pension fund. similarly, we need huge funds for our other future goals as discussed earlier. so, we have to earn and save as much as possible during our productive age, which is only about 30 years.

Hence, in case of job, we have to work till our normal age of retirement and we have to say no to VRs and early retirement. And, in case of business or

profession, we have to work till we are healthy. We have to look for alternative source of income like doctors who do both practice and job simultaneously. We have to keep on updating our knowledge and skills in the field of our job, business or profession to be relevant.

TaxationOnce we earn the income, naturally the taxation follows. It is said, tax and death are inevitable in life. Hence, we have to pay our taxes honestly and have a peace of mind. Instead of tax evasion, we have to use tax planning to save tax. At present, income tax is about 10 to 30 per cent depending on our income slab. If properly planned, effective rate of income tax can be brought down.

Tax can be saved by investments or payments up to R1 lakh under section 80C, e.g. life insurance premium, provident funds, specified bank deposits, NsCs, senior citizen savings scheme, ELss mutual funds, ULIps, National pension scheme, housing loan installments and tuition fees. Tax can be saved on payment up to R15,000 under section 80D towards medical insurance premium and under section 24 on housing loan interest up to R1.5 lakh. We can earn tax-free incomes by investing in provident funds, equity mutual funds, etc.

by investing in these, we not only save tax, but we can also accumulate funds for our future financial goals.

Hence, we have to choose suitable schemes out of the above, as per our overall personal financial planning and asset allocation, and not with the only intention of saving tax. This helps us to achieve our financial goals in addition to tax savings.

Allocation of IncomeOnly income after tax is available to us for allocation towards spending and saving. We have to spend money for our present expenses. And at the same time, we have to keep aside money for our future goals. Assuming the average rate of inflation at 8 per cent per annum, we have to provide more money at about 8 per cent per annum every year for all our future goals. Hence, inflation adjusted funds required for our future goals are huge. so, they can be provided only in installments over a long period of time.

Instead of providing money to one goal at a time, provide money to all goals simultaneously, in required proportion or installments. Otherwise, we may spend more money for the first goal itself and not left with adequate money for subsequent goals. so, have different suitable earmarked investments or assets for different goals. And we have to decide and implement our own “allocation of income” which means: “allocation of income after tax, simultaneously towards various goals such as, present expenses, future expenses and owning assets, in different suitable earmarked investments or assets, in required proportion or in installments, till we accumulate the required funds, for all specific goals”.

Let us assume the allocation of income of a common man as follows:[A] 50 per cent of income for Present

expenses: [Out of which]1. 40 per cent of income for Domestic

expenses2. 5 per cent of income for Insurance

premiums.

…we need huge retirement fund, to maintain the same

standard of living throughout our life. It is almost equal to total domestic expense that we make during our entire productive period. It means for every rupee that we spend now as domestic expense an equal amount is to be kept aside now in self-retirement pension fund.

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Live within your means. Our elders say: stretch your legs as

far as the bed is and be satisfied with what you have. Greed is the root cause of sorrow.

3. 5 per cent of income for Emergency fund.

[B] 30 per cent of income for Future expenses: [Out of which]

1. 15 per cent of income for medium-term goals (which are bellow 10 years far away): Children’s education, marriage and purchase of vehicle.

2. 15 per cent of income for long-term goals [which are above 10 years far away]: self-retirement pension fund and tours and travels after retirement.

[C] 20 per cent of income for Owning assets: [Out of which]

1. 5 per cent of income for gold for personal use and children’s marriage

2. 15 per cent of income for owning real estate such as house, shop, office for personal use, etc.We can have further detailed

breakups of each of the above allocations of income for detailed planning, e.g. detailed breakup of domestic expenses budget, child “A” education fund and child “b” education fund and so on. so, present expenses should be limited to about 50 per cent of income. And the savings for future expenses and owning assets should be at least 50 per cent of income.

Spending and SavingWe have to save a major part of our income for our future goals. savings are the backbone and prerequisite of our personal financial planning. so, how do we control present domestic and lifestyle expenses and save for the future? First, a detailed breakup or budget of monthly domestic expenses, e.g. rent, food, clothing, medicine, electricity, school fees,

entertainment, etc., is to be prepared and then implemented in consultation with and with cooperation of our family members.

We have to adopt a standard of living, which fits in to above domestic expense budget. please remember, upgrading life style is easy, but we may not easily go down once if we are used to a higher one. so, upgrade only if we can maintain it, but not at the cost of other goals. Cut impulsive spending which are without planning and budget. Resist advertisements, purchase with credit card and installment purchases. Keep cash required for one month’s domestic expense and make cash payments only, to have control. We have to save whatever little possible in every opportunity without wasting and neglecting. Even small regular savings grows in to big fund with time. Normally housewives are experts in budgeting and managing domestic expenses.

Our elders always valued the managing of money, as they said: If we don’t save, no matter how much we earn it is useless. What we save is more important than what we earn. Even ants and bees save for rainy days. A penny saved is a penny earned. It is said: drops join to make a stream; grains combine to make a crop. Will smith has somewhere said: Too many people spend money, which they have not earned, to buy things which they do not want, but to impress other people whom they do not like. It is funny yet a reality. Few celebrities who earn well during their golden days become beggars in their latter life, as they do not control lavishness and show off, a lifestyle that is not manageable. We should keep a check on our habits if they affect our health and finance negatively.

The intention behind discussing this topic in such a length is not to threaten or to make you stingy. The only concern here is to learn to expand and then to spend our money evenly

throughout our life instead of wasting money when we have it and starving for it when we need it. personal financial planning is all about to ensure that we have adequate money when we need it. We have to balance between demands of present and needs of future. please remember, life is like a marathon and not a 100 meters race. Hence we have to conserve in order to cover full length of the race, i.e. life. so, spend money slowly, steadily and wisely, and save it for future too.

LoanNowadays, various loans or credits are easily available for each and every type of our needs and goals. Hence we may feel: why to save money and stop spending? please remember, loan is not a gift. It is the present use of our future uncertain income. High rates of interest are charged on many types of loans. spending first by taking loan and subsequently earning, saving and then repaying the loan in future is costly and uncertain. Hence, it is a bad policy. Even recent sub-prime lending crisis and subsequent recession in the UsA was due to such excessive bad loans and money mismanagement. Fortunately, India was not hit worse by it because of our high rate of savings. so, first earn, save and, then, spend. As far as possible, postpone expenses and prepone savings, and avoid loans. It is always a good policy. There is a popular (pIpE) strategy: prepone income and postpone expense.

but there are few good loans also. Housing loan with an EmI of about 15-20 per cent of our monthly income is not bad. Housing loan creates an asset, e.g. house, and it is not an expense. Rate of interest on housing loans is cheaper and tax benefits are also available on it. productive loans for business purposes are also good. but, leveraging or investing in risky assets such as shares from borrowed money is risky.

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Consumption loans, personal loans, purchase with credit card and installment purchases of luxury items are all costly. There is a saying about, eating butter with borrowed money. Taking loan is easy, but its consequences are horrible if we fail to repay it. so, a well-known Kannada poet sarvajna says: sweet as milk and nectar it is to get a loan; when creditors come after you, it’s painful as a broken ribcage.

InsuranceLife is very uncertain and full of risks. All our planning can go waste if we are not adequately insured. so, before investments, one should have adequate insurance. Insure on our life, health of our family, our assets and also our loans by increasing our life insurance coverage. sum assured should be equal to our future potential income, or, it should be adequate to cover the future expenses and commitments of our dependents. so, it should be at least 10 times of our annual income plus our loans, if any. Technically, it can be calculated by human life value method.

pure term insurance is cheap and good. Treat insurance as expense to cover the risk and not as an investment. so, do not mix insurance and investment. money-back policies or ULIps are mixed and complicated products. so, it is difficult for a common man to understand their cost-structure and evaluate and compare them. Let us take simple term insurance for insurance purpose and take fixed deposits or mutual funds for investment purpose.

Emergency Fundsbefore investment, we should have some emergency fund. sometimes, we may not receive regular income, e.g. salary or withdrawals from business or profession. It may be irregular. We may have a loss of our job or business

temporarily and then we may need an emergency fund for present expenses and to keep our investments and insurance going without a break. It is required to meet unexpected expenses that are unbudgeted and to meet the expenses that are not insured or cannot be insured. It is also required to meet medical expenses and vehicle-repairs expenses that cannot be postponed till we receive insurance claims.

so, emergency fund is like a small self-insurance fund in emergency and it serves as a buffer. If this is not maintained, we will be forced to use our earmarked investments/assets kept for future. so, it helps to keep our other investments/assets undisturbed for future.

so, keep aside about a year’s income in emergency fund. It depends upon the nature, risk and cash-flow of our job, business or profession and our insurance coverage. Keep it in a bank savings account that gives us a low return of about 3.5 per cent interest. but, its safety and liquidity is more important than the rate of interest.

InvestmentsIt is said that inflation is a silent killer of our savings. Assuming the average rate of inflation at 8 per cent per annum, the purchase power of our money reduces at about 8 per cent every year. so, what to do? Why to save? Whether to spend all money now itself? No. You might have heard, money earns money and time is money. by investing money, we can earn more by way of interest, dividend and profit. by investing it, we can reduce or overcome the effect of inflation. so, do not keep the saved money idle.

We have to invest our money simultaneously in suitable earmarked investments/assets, in required proportion or in installments till we accumulate the required funds for the specific goals. Einstein described the power of compounding as the eighth

wonder of the world. money earns money and that new money also again earns money, e.g. compound interest. so, start investing early and benefit from compounding. It is said: Waste neither money nor time, but make best use of both.

There are various types of investments or assets, e.g. cash, bank savings account, gold, real estate, debt and equity such as shares, mutual funds and capital in own business or profession. Now let us understand each of the above investments or assets in little detail, which helps us to decide, where to invest.

Cash: We require cash for our domestic expenses. It is the most liquid asset. In hand, it does not earn any income and, moreover, holding excess of it in hand is risky. Hence, keep cash required for our one month’s budgeted domestic expenses and make cash payments.

Bank Savings Account: bank savings account is required to park our income temporarily, till payments are made towards present expenses and for investing the money for future goals. We also require bank savings account for parking our emergency fund. All these transactions are to be rooted through a bank savings account to have control. bank savings account gives us very low return, e.g. about 3.5

Only income after tax is available to us for allocation

towards spending and saving. We have to spend money for our present expenses. And at the same time, we have to keep aside money for our future goals. Assuming the average rate of inflation at 8 per cent per annum, we have to provide more money at about 8 per cent per annum every year for all our future goals.

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per cent per annum, but safety and liquidity of our money here is more important than the rate of return.

Gold: It is a traditional and popular asset. Gold occupies an important position in our custom and tradition. It is especially loved by women and is the second most liquid asset after cash. Hence, it serves as an emergency fund. As it is a movable asset, its safe custody is very important. Keep it in bank safe deposit locker, if not used. Return on gold is low. It just covers the inflation. Hence, it is said that gold is a hedge against inflation. Have it only for our personal use and for children’s marriage. Hold excess gold, if any, in pure form or in gold exchange-traded fund (ETF) and not in the form of jewellery.

Real Estate: Land and building are a traditional and popular asset. House is a dream of all. It gives a sense of achievement, prestige and mental peace. It is an immovable asset and not liquid. Hence, it has both advantages and disadvantages. It is not easy to sell it and spend all. Question of prestige prevents us from doing that. It is also a remedy of last resort. Reverse mortgage facility is available on houses if required in old age. Hence, it gives us confidence. Return on real estate is high and it beats inflation. Land value appreciates but building value depreciates after some time.

Have real estate only for our personal use, e.g. house, shop and office. That itself will be a significant part of an asset allocation of a common man. A person holding an additional real estate other than that for personal use should have the necessary knowledge and skills to handle the below-mentioned disadvantages of real estate: maintenance and repairs expense, depreciation of building, involvement of black money, non-liquidity, litigation, legal aspects, huge investment, non-diversification, custody, tenancy, encroachment, market risk, taxation,

etc. Additional real estate has both high risk and high return like equity due to its disadvantages.

Debt: Debt is loan given by us to others, e.g. provident funds, bank fixed deposits, postal small saving schemes and debt mutual funds. Debt is safe, compared to the equity. but we have to be careful about cheating blade companies and unsecured hand loans among friends and relatives. Return on debt is low. Normally as the term of investment in debt increases, the rate of interest will also increases. Rate of interest on long-term debt is about 8 per cent that is equal to average inflation. Long-term debt takes about 9 years to double the amount as shown in the table below. please see the benefit of compounding effect in the table:

Type of Debt Long Term F.D.

Interest % 8

Year required to double the amount 9

Year End Compounded Amount [R]

0 100

1 108

2 117

3 126

4 136

5 147

6 159

7 171

8 185

9 200[Note: This table is also useful to calculate the inflation adjusted funds required for future goals, as the rate of interest and the average rate of inflation are normally equal]

Normally, interest is taxable except that on provident funds and tax-free bonds. Hence, real rate of return on debt after income tax and inflation is very low or even negative. Investment in debt also can be done through debt mutual funds. Debt mutual funds are tax-efficient and the risk and return is slightly more. We have to invest in debt keeping in view the rate of interest, term of investment, liquidity, safety, tax planning, loan and pre-mature withdrawal facility, etc.

Equity: Equity is investment in the

share of a company or in the capital of a business. In case of shares, it is just participating in the business of a company to the extent of our share holding. Return on equity is normally high and risk is also high. Average return of bsE sensex and probability of loss is as shown in the table:Over 1975 to 2009 [if held for any]

Probability of loss

Average return [%]

1 Year 11/29 25.36

3 Years 6/27 19.55

5 Years 3/25 18.76

7 Years 3/23 19.19

10 Years 1/20 17.16

15 Years 0/15 16.81

20 Years 0/10 16.88[Note: Here March 31 values of BSE Sensex have been considered. It is an important indicator or index of equity market in India]

In a few years, returns are either more or less than these averages. In case of few selected individual shares, returns are either more or less than these averages. but it is said, past performance is not an indicator of the future performance. Economic theory says average return in equity over long-term is equal to the average inflation plus the average GDp of the country. Now, the average inflation is about 8 per cent per annum and the average GDp is about 7 per cent per annum. Hence, average expected return on equity with low probability of loss is about 15 per cent per annum over a term of above 10 years continuously. This analysis is conservative. please refer to the chart. Hence, equity takes about 5 years to double the amount.

So, how do we control present domestic and lifestyle expenses

and save for the future? First, a detailed breakup or budget of monthly domestic expenses, e.g. rent, food, clothing, medicine, electricity, school fees, entertainment, etc., is to be prepared and then implemented in consultation with and with cooperation of our family members.

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The term of investment in equity should be ideally more than 10 years to overcome the effect of slow down or recession in the economy, if any. In any case, the term of investment in equity should not be less than 5 years. please note that here equity includes shares, equity mutual funds, capital in own business or profession and additional real estate.

Shares: Trading in shares on daily basis is not an investment. Trading in shares is very risky, as it is impossible to predict their market in a short term. Investment is for long-term. Investing directly in shares requires time, regular study and skills to select good company and shares to invest. We have to study company’s business, its accounts, its sector, govt. policies, economics of the country and the world. Do not rely on tips and rumors. study yourself to recognize good and bad shares and their valuations. buy the share whose price is less than its valuation. And, sell the share whose price exceeds its valuation. Legendary share investor Warren buffet says: Be fearful when others are greedy and be greedy when others are fearful. Enter and exit market in small amounts gradually to avoid mistiming the market. Diversify the portfolio to spread the risk.

Mutual Funds: Investing directly in shares requires time, regular study and skill to select good company and shares to invest. mutual fund is collective investment from a group of like minded investors through

professional management. mutual funds invest on behalf of us, for a fee of about 2 per cent per annum in specified asset such as debt or equity or gold and in specified ratio. Advantages of mutual funds are professional management, diversification, transparency, affordability, small investment, convenience and good regulation by the sEbI and the AmFI. Types of mutual funds are liquid funds, debt funds, balanced fund, index fund, diversified equity fund, ELss mutual fund, thematic fund, sectoral fund, gold ETFs, large cap fund, mid cap fund, small cap fund, existing open-ended funds and initial public offer [IpO] funds, etc. Each of the above mentioned type of mutual funds having different levels of risk and return, and advantages and disadvantages. so, we have to select our own portfolio of mutual funds based on our risk profile, type of fund suitable, our tax planning, our existing fund and not IpO, having good past record, good return, low risk, low expenses, good service, good team and process of fund management, good fund house – AmC, etc.

To have benefits of equity, we have to invest in five or six, well-managed, existing, diversified equity mutual funds or ELss mutual funds, in growth option, from different fund houses as our core holding. And, only 10 per cent of our total equity investment may be invested in more risky, sector funds or mid cap funds. Invest in mutual funds gradually over a period of minimum one year through systematic investment plan (sIp), if you have regular income, or, through systematic transfer plan (sTp), if you have lump sum money. Withdraw from mutual funds gradually over a period of minimum one year through systematic withdrawal plan (sWp). sIp, sTp and sWp give the benefit of average cost of purchase and sales, and avoid mistiming the market.

Our Business or ProfessionThe capital we put in our own business or profession is also similar to equity investment in a company. In addition to this capital, we also work ourselves in our business or profession. so, the returns from our business or profession should be at least 15 per cent per annum on our capital investment, like in equity, plus salary to our self, based on our qualification, skills, experience and time spent. Liability is limited in case of shares. but it is unlimited in our own business or profession. In partnership business or profession, there is also joint and several liability. so be careful.

Keep your business accounts and money separately from your personal money to know the correct profit/loss and assets/liabilities of the business or profession and to avoid the diversification of funds. please remember in case of business or profession that only net realizable capital is ours. please do not keep on reinvesting and expanding the same business ignoring the risk in the business or profession and our other financial goals. We must have regular income for present expense and for investing the money for other future goals. Hence, we must have regular withdrawals out of the profits for this purpose.

Debt-Equity RatioGenerally, if the return is high, the risk will also be high. Debt is safe compared to equity. but return in debt is low and it is about 8 per cent per annum. And it is not able to beat the inflation. Equity is risky compared to debt. but return in equity is high and it is about 15 per cent per annum as discussed earlier. It is almost double than that in the debt and it is able to beat the inflation. If we choose to invest only in debt because of its safety, we have to save and invest more, i.e. almost double compared to the equity to accumulate the same

Pure term insurance is cheap and good. Treat insurance as

expense to cover the risk and not as an investment. So, do not mix insurance and investment. Money-back policies or ULIPs are mixed and complicated products. So, it is difficult for a common man to understand their cost-structure and evaluate and compare them.

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amount. so, it is difficult to achieve all our goals with limited savings and investment in debt. Equity gives us an opportunity to achieve our goals with lesser saving and investment. Hence, equity investment is essential.

Equity gives us higher return to beat the inflation, if invested in planned manner: We have to balance between the risk and return, i.e. debt and equity. We have to decide and implement our own debt-equity ratio that means how much or in what proportion we have to invest in debt and in equity depending on our needs and risk profile to fulfill our financial goals. Our risk profile again depends on our willingness to take risk and our ability to take risk:

Willingness to Take Risk: Following guidelines help us to decide our willingness to take risk: equity market is volatile by nature. Its prices fluctuate in short-term due to demand and supply condition of the equity market. but in long-run, equity prices move along with the fundamentals, e.g. company’s performance, share valuation, general economic condition and GDp of the country. Hence, if the above fundamentals are strong, don’t panic in case of short-term notional loss due to market movements. You should be mentally prepared to see such losses in your equity portfolio. Do not lose heart. Wait for the market to recover. please do not waste time and energy, and increase your blood pressure by checking the share prices and NAVs of mutual funds daily. Only

periodical review and rebalancing of equity portfolio is sufficient for long-term investing. Equity investing should be our part-time activity and we should be able to continue and concentrate on our main occupation as usual.

If you strongly believe in and follow the above fundamentals, and ready to take such short-term risk, we can say you have the willingness to take risk. Hence, invest in risky asset, e.g. equity, only if you have the willingness to take risk as per the above guidelines. but take risk only till you can have sound sleep and peace of mind.

Ability to Take Risk: Following guidelines helps us to decide our ability to take risk:1. Guideline based on the term of

investment: It is said that time in the market is important and not timing the market. The probability of loss in equity is zero, if continuously invested for more than 10 years as discussed earlier. It is still a conservative statement. Kindly refer to the chart. Hence, if financial goal is less than 10 years far away, its funds should be invested in debts. And, if the financial goal is more than 10 years far away, its funds may be invested in equity. so, medium-term investments up to 10 years should be in debts and long-term investments above 10 years may be in equity.

2. Guideline based on the age: When we are young and earning, time will be on our side. Our ability to recover from the short-term loss, if any, will be more. Hence our ability to take risk will be high when we are young and earning and when our goals are far away. We can have more equity and less debt. but we have to gradually decrease equity and increase debt as we grow old or get near our retirement or to achieve the goals.

suggested formula of debt-equity ratio based on the age is: per

cent of debt in debt-equity ratio should be equal to our age and per cent of equity in debt-equity ratio should be 100 minus our age, e.g. suggested debt-equity ratio (ratio between debt and equity) for 50-year-old person is 50 per cent: 50 per cent, for 30-year-old person is 30 per cent: 70 per cent, and for 70-year-old person is 70 per cent: 30 per cent.

3. Guideline based on the occupation: A man of business or profession will be already having high risk and high return in his own business or profession similar to equity. Hence, a business or professional man should have more debt investments than equity. A salaried person will be already having low risk and fixed salary job, and having other retirement benefits, e.g. provident fund and pension similar to debt, so she/he may have more equity investments than debt. Here, equity includes capital in own business or profession for the purpose of debt-equity ratio.

4. Guideline based on the additional real estate: Additional real estate is also having high risk and high return similar to equity due to its disadvantages discussed earlier. Hence, person holding additional real estate should have more debt investments than equity. Here equity includes additional real estate for the purpose of debt-equity ratio. so, invest in risky assets, e.g. equity as per your risk profile, only if you have the willingness to take risk and only to the extent of your ability to take risk as per the above guidelines. Willingness to take risk is like taste and ability to take risk is like the power to digest. so, eat equity only if you have taste and power to digest the equity.

Asset AllocationNow, we understand each of the above

Assuming the average rate of inflation at 8 per cent per annum,

the purchase power of our money reduces at about 8 per cent every year. So, what to do? Why to save? Whether to spend all money now itself? No. You might have heard, money earns money and time is money. By investing money, we can earn more by way of interest, dividend and profit.

483

BANKING AND FINANCE


investments or assets in little detail with regard to their nature, risk and return, and advantages and disadvantages, and how to invest in them based on our risk profile. Now, we have to decide where we have to invest. An investment or asset which is good for one person may not be suitable for other person. Hence, we have to decide and implement our own asset allocation, i.e. in which assets or investments we have to invest and in what proportion or how much we have to invest depending on our needs and risk profile to fulfill our financial goals.

Let us examine each investment or assets one by one as to see whether it fits in to our asset allocation:1. Cash in hand does not earn any

income, but we require it for our domestic expenses. Hence keep cash required for our one month’s budgeted domestic expenses and make cash payments.

2. Return on bank savings account is very low. but bank savings account

is required to park our income temporarily till payments are made towards present expenses and for investing the money for future goals. We also require bank savings account for parking our emergency fund. Hence, keep aside about one year’s income in bank saving account as emergency fund.

3. Return on gold is low. Hence, have it only for our personal use and for children’s marriage.

4. Return on real estate is high, but it has both advantages and disadvantages. so, have it only for our personal use, e.g. house, shop, office, etc. That itself will be a significant part of an asset allocation of a common man.

5. Gold and real estate held for personal use are blocked assets and cannot be treated as investments in true sense. Investments are those where we park money temporarily for returns and accumulation of required funds for future. Hence, debt and equity are here considered as investments in true sense.

6. We have to invest in debt and equity as per our debt-equity ratio assessing our risk profile based on our willingness to take risk and our ability to take risk.It is said: do not put all eggs in

the same basket. It is very difficult to judge which investment or asset is going to perform good or bad in future. so, we have to diversify our investments or assets as per our asset

allocation and spread the risk. Hence, invest the money simultaneously as per our asset allocation in different earmarked investments or assets in required proportion or installments till we accumulate the required funds for the specific goals. Cash and bank balance spent on domestic expenses and insurance premiums payment are our expenses. Only debt, equity, gold and real estate are our wealth.

Let us assume the asset allocation of a common man as follows:[A] 50 per cent of income to be kept in cash or bank savings a/c for Present expenses: [Out of which]1. 40 per cent of income in cash for

domestic expenses2. 5 per cent of income in bank

savings account for insurance premiums

3. 5 per cent of income in bank savings account for emergency fund

[B] 30 per cent of income or 60 per cent of wealth as per debt-equity ratio for future expenses: [Out of which]1. 15 per cent of income or 30 per

cent of wealth in debt, e.g. bank F.D., for medium-term goals [which are bellow 10 years far away]: Children’s education, marriage and purchase of vehicle.

2. 15 per cent of income or 30 per cent of wealth in equity, e.g. mutual Funds, for long-term goals [which are above 10 years far away]: self-retirement pension fund and tours and travels after retirement.

Economic theory says average return in equity over long-

term is equal to the average inflation plus the average GDP of the country. Now, the average inflation is about 8 per cent per annum and the average GDP is about 7 per cent per annum. Hence, average expected return on equity with low probability of loss is about 15 per cent per annum over a term of above 10 years continuously.

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[C] 20 per cent of income or 40 per cent of wealth in gold and real estate for owning assets: [Out of which]1. 5 per cent of income or 10 per

cent of wealth in gold for gold for personal use and children’s marriage.

2. 15 per cent of income or 30 per cent of wealth in real estate for owning real estate such as house, shop, office for personal use.We can have further detailed

breakups of the above asset allocation for detailed planning. We have to rebalance our debt-equity ratio periodically, i.e., once in a year, if it goes out of proportion. We have to suitably revise both our debt-equity ratio and our asset allocation on major changes in our life or on changes in our goals.

To sum up, money required for monthly domestic expenses is to be kept in cash, for emergencies be kept in bank savings account, for medium-term goals to be kept in debt, for long-term goals to be kept in equity, and for our personal use to be kept as gold and real estate. Above all, we have to be adequately insured.

Utilisation of Funds The purpose of different investments or assets is as follows: Cash and bank balances are for present expenses, debt and equity are for our future expenses, and gold and real estate are for our personal use and then for inheritance. We have to invest in debt so as to match the maturity date of debt investments with the dates of requirement of funds for the specific goals. This is to be done to ensure liquidity when in need and to avoid loss of interest due to premature encashment of debt investments. And on maturity we have to liquidate the earmarked debt investment and use the money for the specific goal as per our plan.

And in case of equity, we have to start withdrawing the money from

the earmarked mutual funds at least one year earlier from the dates of requirement of funds for the specific goals. Withdraw from mutual funds gradually over a period of minimum one year through systematic withdrawal plan (sWp). The sWp gives the benefit of average cost of sales and avoid mistiming the market. And keep it in savings bank account or short-term bank deposit and then use the money for the specific goal as per our plan.

After retirement, accumulated balance in self retirement pension fund is to withdrawn through sWp and it is to be kept in risk-free schemes, e.g. bank or postal monthly-income scheme or senior citizens scheme, to receive life-long regular monthly income for peaceful retired life. Use our assets such as gold and house for your personal purpose till you and your spouse are alive.

Inheritance All our family members must know our financial planning, income and expenses, assets and liabilities, insurance and safe keeping of financial documents. make all investments and assets in the joint name with spouse. make nominations in favor of children in all investments. Create will for smooth transfer of investments and assets to avoid subsequent litigation. Do not loose control over your investments

and assets till you and your spouse are alive. Hindi films like Avtaar, starring Rajesh Khanna, and Baghban, starring Amitabh bachchan, have dealt with this issue and make a strong recommendation to all of us: It is wiser to be financially independent till we and our spouse are alive. mostly, we consume cash and bank balance for our expenses and debt and equity for the specific goals during our life time. And normally, we leave our assets such as gold, real estate and our business or professional setup and unused funds, if any, to our next generation.

Just accumulating money for the next generation is not a good policy. There is no end for such practice and it will not serve any purpose also. It leads to unfair practices such as tax evasion. It may also spoil our coming generations, as they may not understand the real value of money. money is not everything in life. It is a means to achieve only our financial goals. We have to devote time to other goals as well that give us happiness and peace. According to poet Kabirdas, there is no need to earn money and leave that for a son, as a good son will earn for himself and there is no need to leave anything for a bad one. It is said: Do not make assets for them, but make them an asset. so, educate them, help them in their career and marriage, etc., and make them financially independent. Let them start their own personal financial planning as we did. n

Do not loose control over your investments and assets till you

and your spouse are alive. Hindi films like Avtaar, starring Rajesh Khanna, and Baghban, starring Amitabh Bachchan, have dealt with this issue and make one strong recommendation to all of us: It is wiser to be financially independent till we and our spouse are alive.

485

REFERENCE


Index of some useful articles taken from Periodicals/Newspapers received during July-August 2010 for the reference of Faculty/Students & Members of the Institute.

Full Texts of the above articles are available with the Central Council Library, ICAI, which can be referred on all working days. For further inquiries please contact on 011-23370154 or by e-mail at

[email protected]

ACCOUNTANT’S BROWSER ‘PROFESSIONAL NEWS & VIEWS PUBLISHED ELSEWHERE’

1. ACCouNTINgDifferent Approaches to Corporate Reporting

Regulation: How Jurisdictions Differ & Why by Christian Leuz. Accounting & business Research, Vol.40/3, 2010, pp. 229-256.

Fair Value Accounting, Financial Economics & the Transformation of Reliability by michael power. Accounting & business Research, Vol.40/3, 2010, pp. 197-210.

For secretarial Compliance management, mCA’s Easy Exit scheme, 2010 & settlement scheme, 2010 will Give a boost by Delep Goswami. Chartered secretary, July 2010, pp. 929-933.

How Can We measure the Costs & benefits of Changes in Financial Reporting standards? by Katherine schipper. Accounting & business Research, Vol.40/3, 2010, pp. 309-327.

The ICAEW’s Recommendations on Accounting principles & secrecy of process by stephen A. Zeff. Accounting & business Research, Vol.40/3, 2010, pp. 279-285.

Labour market Consequences of Accounting Fraud by Chun-Keung Hoi & Ashok Robin. Corporate Governance, Vol.10/3, 2010, pp. 321-333.

2. AuDITINgThe big Debate: Audit is in the spotlight. How might

it Evolve to meet Future market Needs & What are the Challenges? by Juliana sancto. Accountancy, July 2010, pp.96-99.

Disciplinary measures in Response to Restatements After sarbanes-Oxley by Jeffrey J. burks. J. Account. public policy, Vol.29, 2010, pp. 195-225.

Does it Add Up? Early Evidence on the Data Quality of XbRL Filings to the sEC by Roger Debreceny etc. J. Account. public policy, Vol.29, 2010, pp. 296-306.

Lessons in banking Audit by Dust settles & Iain Coke. Accountancy, July 2010, pp. 100-101.

Litigation Environment & Auditors’ Decisions to Accept Clients’ Aggressive Reporting by Nen-Chen Richard Hwang & C.Janie Chang. J. Account. public policy, Vol.29, 2010, pp. 281-295.

The methodology of secretarial Audit by K.R. Chandratre. Chartered secretary, July 2010, pp. 913-919+925.

secretarial Audit – A Tool to better Corporate Governance by s.D. Israni. Chartered secretary, July 2010, pp. 926-928.

3. ECoNoMICSHave the state Finance Commissions Fulfilled their

Constitutional mandated? by m.A. Oommen. Eco. & pol. Weekly, July 24, 2010, pp. 39-44.

smE Credit Crunch by Gavan Ord. Intheblack, July 2010, pp. 54-56.

4. EDuCATIoNAre we Heading Towards World-Class Universities? by

C.p.s. Chauhan. University News, July 12-18, 2010, pp. 27-35.

Indian Higher Education: New Horizons & plausible Challenges… Whittling a Way Ahead by beena shah. University News, July 12-18, 2010, pp. 64-71.

5. INVESTMENTA Comparison of selected Features of Real Estate

Investment Trust Regimes in the United states, the United Kingdom & Germany by Nicola Fritsch etc. bulletin for International Taxation, July 2010, pp. 367-380.

6. MANAgEMENTAre you Ignoring Trends: That Could shake Up Your

business? by Elie Ofek & Luc Wathieu. Harvard business Review, July-August, 2010, pp. 124-131.

The Crux of Risk & Reward by Gabrielle Upton. Intheblack, July 2010, pp. 58-59.

Good Governance & sustainability by IFAC,CGA magazine, July-August 2010, pp. 39-43.

GsT – Introduction & Role of Cost & management Accountant by Dilip m. bathija. The management Accountant, July 2010, pp. 530-532.

How Will You measure Your Life? by Clayton m. Christensen. Harvard business Review, July-August 2010, pp. 46-51.

7. TAXATIoN & FINANCEFinance Act, 2010 by p.N. shah. bCAJ, July 2010,

pp.21-34.Turning business Losses into Tax Refunds by Robert E.

Harrison. Journal of Accountancy, July 2010, pp. 46-48.

486

BOOK REVIEW

september 2010 tHe CHArtereD ACCOUNtANt 111*Reviewed by CA. Khurshed Pastakia, Mumbai

This almost 1000-page text on topics that are of great importance to the auditing fraternity is obviously a labour of love.

the first part of the book deals with modified opinions under existing sA 700 (corresponding to AAs 28). the authors have presented over eighty specimens of auditor’s reports laboriously extracted by them from published annual reports of companies. this voluminous compilation will undoubtedly be a guide to auditors when framing auditor’s reports for their clients.

What one perhaps misses is a topic-wise index of the modifications, cross-referenced to the related auditor’s reports in which such modifications have been made. such an index could have made referencing easier.

the other point for users to note is that the existing ICAI standard sA 700 (corresponding to AAs 28), on which this book is based, is due to become outdated from periods beginning April 1, 2011 and will be replaced by sA 700 (revised), sA 705 and sA

706. these three standards, all dealing with auditor’s reports, contain significant conceptual and presentation changes in how auditor’s reports will be drafted in future. Nevertheless, parts of the book will still remain relevant – especially the chapter dealing with CArO.

the second part of the book is a referencer on accounting standards. It seeks to briefly explain each standard and gives illustrative disclosures taken from real life annual reports of companies. this compilation will be a useful guide to both accountants and auditors.

the caution that users will, however, need to exercise is to realise that accounting standards can sometimes be interpreted differently in different situations by different professionals, and the authors’ learned interpretation should therefore always be considered as somewhat less than sacrosanct.

As compared to auditing standards, accounting standards are an even faster moving target and, even as one writes this, over twenty-five exposure drafts of revised accounting standards are sitting on the ICAI website awaiting comments and approval of the Accounting standards board in the process of convergence of Indian standards with IFrss with effect from April 1, 2011. Nevertheless, the existing standards dealt with in this book, will (with some small modifications that are being contemplated), continue to remain relevant for phase 2 and phase 3 enterprises that move to the converged accounting standards at later dates, as well as to small and medium enterprises.

the third part of the book includes an accounting standards disclosures checklist. this is an important checklist that should be very useful to all practitioners. most accounting standards checklists in circulation deal more with recognition and measurement principles of the accounting standards than with presentation and disclosures stipulations which are equally, if not more, important. this checklist is refreshingly different and will be welcomed by the fraternity. n

Title :Qualifications In the

Auditor’s report And Disclosures On

Accounting standards

Author :Dr. sanjeev singhal

CA. Krishan Kant tulshan

Pages :985

Price :INR985 (with CD)

Publisher :bharat Law House pvt.

Ltd., New Delhi

A Useful Book for CAs Undertaking Auditing Work*

487

NATIONAL UPDATE


the ‘Report on Goods and services Tax survey: Industry expectations and perceptions’ said. The study was based on response from over 200 senior executives of top companies in diverse fields like auto, FmCG, power and energy, real estate, IT, pharmaceuticals and financial services. “...most of the respondents had presence on a pan-India basis and they expect GsT to be a unifying fiscal legislation across the national market,” the survey added. The government plans to roll out the GsT from April 1, next year. All central and state taxes like excise, VAT and service tax will be rolled into GsT, once the new regime comes into effect. The revenue from GsT will be shared equally between the centre and states. The study also found that 44 per cent of the executives felt that the GsT could be an opportunity to consolidate their business operations as the proposed changes in the indirect tax structure would transform India into a national market. (Source: http://www.financialexpress.com/)

Non-compete Fees Taxable, Rules ITATNon-compete fees are capital expenditure and therefore

liable to tax, according to a recent ruling by the Income-tax Appellate Tribunal, Delhi. The special bench of ITAT, Delhi gave this ruling on July 30, 2010, on an appeal filed by Tecumseh India, the Indian arm of the Us-based Tecumseh. The transaction in question was the acquisition of Whirlpool assets at Faridabad and ballabgarh and the non-compete fees it paid to Whirlpool. The assets were purchased on July 2, 1997 but the agreement for non-compete fees of R2.65 crore was signed on July 10, 1997. since the non-compete fee was claimed by Tecumaseh as revenue expenditure, it accordingly deducted the amount from computation of taxable income. The I-T department did not agree with the taxpayer’s contention and held that the payment of non-compete fee was capital expenditure and therefore tax has to be paid. The assessing officer, therefore, added the expenditure back into the income computed for purpose of levying tax. The company had cited the Delhi High Court decision in the case of Eicher to support its case. In the case of Eicher, the Delhi High Court had held that the non-compete fees are mainly for protecting the profitability and business interest of the company. Further, since no profit-making apparatus was created through the payment of non-compete fees, such expenditures could be classified as revenue expenditure, and therefore tax was not payable on this count. The tax payer company had also argued that the acquisition of Whirlpool assets and the agreement for the non-compete fee were made on different dates and therefore the latter could not be construed as part of the acquisition. The I-T department contented that though moU and the agreement for paying non-compete fees, are signed on separate dates, they are part of the same transaction that could be classified as capital expenditure. The I-T department cited section 6 of the Indian Evidence Act which stipulates that courts should take note of facts which formed

India to Become World’s Fastest Growing Economy by 2013-15: Report

The two hands to produce count for more than that one mouth to feed, after all. Driven by a sterling demographic dividend, continuing structural reform and globalisation, India is poised to accelerate its growth rate to 9-9.5per cent over 2013-15, even as China will cool down to a more sedate 9per cent by 2012 and to 8per cent by 2015. so finds a new report by a global financial services firm headquartered in New York. India has one of the lowest median ages among the major economies. When an economy prospers, first its death rate and then, its birth rate falls. As this trend proceeds, there is a big bulge in the working age population while the non-working population (the young and the old) shrink as a share of the population. The lowering of the dependent (non-working) population to working age population ratio has twin effects. One, it allows people to save a large proportion of their income, raising the country’s rate of savings; two, it boosts the number of people who work and contribute to growth. Thanks to structural reform, the additional hands available for work find work. Even with stagnant per capita output, the sheer increase in the number of workers would raise GDp growth. With reform pushing up productivity per worker, GDp would rise even faster. Globalisation gives additional job opportunities, additional capital to augment rising domestic savings and additional know-how. With this happy combination, the report expects India to become the world’s fastest-growing economy. The government’s chief economic advisor Kaushik basu has been forecasting such a development as well. “Real GDp growth in China has averaged 10per cent annually over the past 30 years, compared with 6.2per cent in India. During this period, China’s GDp grew 16 times to $5 trillion whereas India’s rose seven times to $1.2 trillion. China’s exports (including services) surged 65 times over this period to $1,330 billion while India’s exports increased 22 times to $250 billion” says the report.

China has overtaken Japan to become the world’s second-largest economy. China’s demographic transition pushed up its savings rate above 30per cent in 1985, while India’s savings rate crossed that level only in 2005. India’s consumption level will now come down, even as China’s will rise. (Source: http://economictimes.indiatimes.com/)

CEOs say GST will raise profits: SurveyAn overwhelming majority of senior executives from

various sectors favour introduction of the proposed Goods and services Tax and think that it will increase profitability for firms, according to a survey by industry body CII and a global consultancy firm. The survey also found that industry Representatives feel that the single unified tax structure would help in consolidation of business. “Eighty eight per cent of the survey respondents prefer having a single national GsT enactment, both for Centre and the states,”

488

NATIONAL UPDATE


part of the same transaction though they may have occurred at different places and time. It said the non-compete clause was part of the same transaction(Source: http://www.cainindia.org/)

Indirect tax kitty swells 46per centIn yet another sign of economic recovery, indirect tax

collections in the first four months (April-July) of this financial year jumped 46 per cent to R96,223 crore, compared with a mop-up of R65,816 crore in the corresponding period of 2009-10. The growth is led by a whopping 71 per cent increase in Customs duty receipts to R41,545 crore, against R24,323 crore in the same period last year, indicating a surge in India’s trade. Excise duty collections also showed a sharp 43 per cent rise to R38,260 crore in April-July 2010-11, against R26,792 crore in the corresponding months last year. service tax and receipts, however, showed 12 per cent growth to R16,418 crore, compared with R14,685 crore in the year-ago period. Apart from increase in the volume of exports and imports, which increased by 32 per cent and 34 per cent, respectively in April-June, finance ministry officials attributed the growth to the increase in petroleum duty.(Source: http://beta.profit.ndtv.com/news)

‘Over R12k cr of Tax Demands Locked in Court Disputes’

Over R12,000 crore in tax demands was locked on account of disputes, pending resolution at various courts, as on June 30, 2010, parliament was informed recently. While cases involving tax demand of about R7,635 crore are pending in Income Tax Appellate Tribunal (ITAT), around R3,849 crore is locked up in cases with High Courts, Finance minister pranab mukherjee told the Lok sabha in a written reply. besides, disputed matters over tax liability of about R550 crore are lying with the supreme Court, he said. There are 4,739 cases pending in the supreme Court, 21,568 disputes lying with High Courts and 17,522 matters with ITAT, mukherjee said. Recently, the Finance minister had called the Income Tax Department as the biggest litigant and asked it to re-examine the way it handles tax disputes. (Source: http://www.thehindubusinessline.com/)

CAG Empowered to Vet NGOs Involved in Govt’s Social Sector Schemes

The Comptroller and Auditor General of India (CAG) has now been empowered to vet all non-government organisations (NGOs) and other agencies involved in the government’s social sector schemes. The planning Commission has decided that approvals for all social sector projects undertaken by various NGOs, normally outside the purview of CAG, will come with the rider that they will be subject to audit, if required. The inclusion of this clause had become necessary as inspection of the account books of private entities that spent government money was not part

of CAG’s mandate. The current law empowers it to audit only traditional government departments and public sector companies. In January, the report of the task force on social audit had pointed out that the audit jurisdiction of CAG was limited when it came to panchayati raj institutions (pRI), urban local bodies (ULb) and other agencies or societies. “statutorily, audit of local self governance institutions is a state subject and the primary (external) audit of pRIs and ULbs is with the state Local Funds Audit Department (LFAD), or with the designated auditors as specified in the state laws,” the report had pointed out, thereby emphasising the need for wider powers to CAG through amendment to existing rules. The planning Commission’s intervention is expected to empower CAG to actually verify, if need be, every rural road or employment generation for every household in a gram panchayat by utilising the services of the members of the Institute of Chartered Accountants of India (ICAI).(Source: http://www.cainindia.org/)

‘Government Has Imposed Service Tax on Air Travellers’

Government has imposed a service tax on all domestic and international air travellers, Civil Aviation minster praful patel informed the Lok sabha recently. The rates of service tax on domestic air travel have been fixed at the rate of 10 per cent of the gross value of the ticket or R100 per trip, whichever is lower, patel said. For those international passengers travelling in economy class and embarking in India it would be charged at the rate of 10 per cent of the gross value of the ticket or R500 per trip, whichever is lower. However, those travelling to or from the airports situated in Assam, meghalaya, manipur, mizoram, Tripura, Nagaland, Arunachal pradesh, sikkim and bagdogra in West bengal have been exempted. (Source: http://www.business-standard.com)

Avoid Litigation Where Duty is Negligible: HC to Customs Dept

To reduce burden on courts and revenue officials, the bombay High Court has asked the Central board of Excise and Customs (CbEC) to direct senior authorities to not to go for appeals and litigation where duty impact is not substantial. The high court has also asked the CbEC to consider the necessity of issuing circular to this extent. A division bench of Justice V.C. Daga and Justice s.J. Kathawalla was hearing an appeal filed by the Central Excise Department to impose penalty on the duty of R1.21 lakh recoverable from a drug manufacturing company. The HC observed that a number of appeals are being filed before the court in which customs and central excise duty involved is negligible. “sometimes the expenses incurred by the Revenue Department are disproportionate to the stakes involved in the appeal or petition filed by the department,” the order said. (Source: http://www.business-standard.com)

489

INTERNATIONAL UPDATE


board (IAEsb), a standard-setting board supported by the IFAC, has released an International Education Information paper to help professional organizations conduct written examinations to assess the capabilities and competence of candidates for qualification. The paper, available online at the IFAC website, is intended to help member bodies implement International Education standard (IEs) 6, Assessment of professional Capabilities and Competence, issued in October 2003. It is especially useful to developing organizations that need to make decisions on assessment practices for their education programs.(Source: http://press.ifac.org/news)

A4S and GRI Announces Formation of the IIRC

The prince’s Accounting for sustainability project (A4s) and the Global Reporting Initiative (GRI) has recently announced the formation of the International Integrated Reporting Committee (IIRC). The IIRC brings together a cross section of representatives from the corporate, accounting, securities, regulatory, NGO, and standard-setting sectors. Ian ball, CEO of IFAC, will serve as co-chairman of the Working Group. Its objective is to create a globally accepted framework for accounting for sustainability that brings together financial, environmental, social and governance information in a clear, concise, consistent and comparable format. (Source: http://press.ifac.org/news)

Two IFAC Nominees Selected as Members of IFRS SME Implementation Group

The IFAC has welcomed the announcement by the International Financial Reporting standards (IFRs) Foundation of the membership of the newly-created smE Implementation Group (smE IG). It is pleased to note the appointment to the smE IG of two of its nominees—Robin Jarvis and Ricardo Rodil. The group’s mission is to support the adoption and implementation of the IFRs for small and medium-sized Entities (IFRs for smEs) around the world. As such, it will develop non-mandatory guidance for implementing the IFRs for smEs in the form of questions and answers that will be made publicly available on a timely basis and make recommendations to the IAsb if and when needed regarding amendments to the IFRs for smEs.(Source: http://press.ifac.org/news)

IFAC SMP Committee Publishes Quality Control Implementation Guide

The small and medium practices (smp) Committee of the International Federation of Accountants (IFAC) has recently issued the second edition of its Guide to Quality Control for Small- and Medium-Sized Practices (QC Guide). The implementation guide is intended to help smps understand and efficiently apply the redrafted International standard on Quality Control (IsQC) 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements. The first edition of the QC Guide was issued in march 2009 and went on to become IFAC’s second most downloaded publication after the Handbook of International Auditing, Assurance, and Ethics Pronouncements last year. The new edition conforms to the revised and redrafted Code of Ethics for Professional Accountants and includes various improvements based on feedback from users of the first edition. It features an integrated case study, practical checklists and forms, and two sample quality control manuals. According to the smp Committee, this guide will help smps to cost effectively implement IsQC 1 and ensure that they can provide high-quality assurance and related services to their clients. The Guide can be downloaded free of charge from the IFAC website. besides, the readers may also visit www.ifac.org/smp, which hosts a collection of free IFAC publications and relevant links to resources.(Source: http://press.ifac.org/news)

Arnold Schilder Reappointed to Chair the IAASB from 2012 to 2014

The board of the IFAC has reappointed prof. Arnold schilder to lead the International Auditing and Assurance standards board (IAAsb), an independent standard-setting board supported by the IFAC, for the period 2012–2014. As chairman, prof. schilder will play a key role in guiding the IAAsb as it strives to enhance the quality and uniformity of audit practice throughout the world by promoting the adoption and implementation of its standards on Auditing. His reappointment, beginning from January 1, 2012, was approved by the public Interest Oversight board (pIOb) — an independent body that oversees IAAsb activities.(Source: http://press.ifac.org/news)

IAESB Releases Paper on Education Assessment Practices

The International Accounting Education standards

490

INTERNATIONAL UPDATE


IASB and US FASB Publish Proposals to Improve Financial Reporting of Leases

The International Accounting standards board (IAsb) and the Us Financial Accounting standards board (FAsb) today published for public comment joint proposals to improve the financial reporting of lease contracts. The proposals are one of the main projects included in the boards’ memorandum of Understanding. The proposals, if adopted, will greatly improve the financial reporting information available to investors about the financial effects of lease contracts. Entities interested in volunteering may contact Aida Vatrenjak at [email protected] or Danielle Helmus at [email protected] by september 15, 2010.(Source: http://www.ifrs.org/News/)

IFRS Foundation Appoints Members of SME Implementation Group

The IFRs Foundation and the oversight of the IAsb, has announced the membership of the newly created smE Implementation Group. The mission of the Group is to support the international adoption of the IFRs for small and medium-sized Entities (IFRs for smEs) and to monitor its implementation. The Group has two main responsibilities: to develop non-mandatory guidance for implementing the IFRs for smEs in the form of questions and answers and to make recommendations to the IAsb if and when needed regarding amendments to the IFRs for smEs. Representatives of the European Commission and the European Financial Reporting Advisory Group (EFRAG) will participate in the work of the Group as observers.(Source: http://www.ifrs.org/News/)

IFRS Taxonomy 2010 Updated for Latest Annual Improvements to IFRSs

The IFRs Foundation has released the first interim release for the IFRs Taxonomy 2010, which is a translation of IFRss as issued at January 1 2010 into XbRL (eXtensible business Reporting Language). This interim release reflects Improvements to IFRss for the 2008-2010 project cycle, which was published in may 2010 as part of the IAsb’s annual improvements process. The decision to issue IFRs Taxonomy interim releases will support the early adoption of IFRss, by providing taxonomy items earlier for reporting electronically using the latest IFRss. IFRs Taxonomy 2010 interim releases are consistent with the XbRL architecture of the IFRs Taxonomy 2010.(Source: http://www.ifrs.org/News/)

IASB Proposes Improvements to Insurance Accounting

The IAsb has published for public comment an exposure draft of improvements to the accounting for insurance contracts. The exposure draft proposes a single International Financial Reporting standard (IFRs) that all insurers, in all jurisdictions, could apply to all contract types on a consistent basis. In developing the proposals, the IAsb considered more than 160 comment letters received on the discussion paper, as well as feedback from interested parties through an extensive outreach programme including interaction with the IAsb’s Insurance Working Group and a targeted field test with preparers. The exposure draft is open for comment until November 30, 2010. (Source: http://www.ifrs.org/News/)

User Questionnaire – Exposure Draft on Mea-surement Uncertainty Analysis

The IAsb has recently published a questionnaire for financial statement users on its June 2010 exposure draft Measurement Uncertainty Analysis Disclosure for Fair Value Measurements. It asks analysts to complete the questionnaire to provide input on the proposals in the exposure draft on measurement uncertainty analysis for Level 3 fair value measurements. This questionnaire, targeted at analysts, forms part of a comprehensive programme of outreach activities to all IFRs constituents. The deadline to complete the questionnaire is september 7, 2010. (Source: http://www.ifrs.org/News/)

IFRS Foundation Publishes Illustrative examples in XBRL for IFRS Taxonomy

In order to provide assistance with the preparation of financial statements in International Financial Reporting standards (IFRs) with the XbRL, the IFRs Foundation has published illustrative examples in XbRL for the IFRs Taxonomy 2010. The purpose of these examples is to illustrate the use of the IFRs Taxonomy in financial state-ments, in accordance with the XbRL architecture out-lined in The IFRs Taxonomy Guide. Illustrative examples available on the IFRs website have been provided for statement of financial position, comprehensive income, changes in equity and cash flows, for notes - property, plant and equipment - reconciliation of carrying amount at the beginning and end of the period, and for notes - disclosure of inventories. Each example is provided in both XbRL and Inline XbRL (iXbRL) format. (Source: http://www.ifrs.org/News/)

491

ECONOMIC UPDATE


492

CABF DONORS


S.No. M.No. NAME OF FIRMS/MEMBERS

AMOUNT (R)

1 054670 CA. Subodh Kumar Agrawal 100000.002 011330 CA. Ajeet Singh Patwa 100000.003 015961 CA. Prem Kumar Gupta 100000.004 081849 CA. Rajeev Kumar Chopra 101000.005 081978 CA. Sujata Chopra 51000.006 512881 CA. Jigyasa Chopra 51000.007 Banglore Branch Southern

India Regional Council of the Institute of Chartered Accountants of India

120000.00

8 Western India Regional Council of Institute of Chartered Accountants of India

67000.00

9 010420 CA. K. M. Agarwal 51000.0010 032199 CA. Bhailalbhai Kanjibhai

Patel15000.00

11 North Campus Study Circle of Northern India Regional Council of the Institute of Chartered Accountants of India

11000.00

12 071213 CA. P. P. Pareek 11000.0013 012908 CA. Rattan Lal 11000.0014 006774 CA. K. B. Kapur 11000.00

The Institute of Chartered Accountants of India duly acknowledges the following members for making generous contributions to the Chartered Accountants Benevolent Fund (CABF):

CA. Subodh Kumar Agrawal CA. Prem Kumar CA. Ajeet Singh Patwa

4810 FCA with nearly 20 years of experience (mostly industrial) with experience in ERp interested in taking up full time employment. Also interested in taking assignments/joinng audit firms as partner in Hyderabad e-mail: [email protected]

4811 A fiirm of Chartered Accountants based in New Delhi requires chartered accountants for auditing, business valuations, project evaluation, financial consultancy and credit audit. Remuneration is depended upon experience in the reference fields. Apply with complete details [email protected] or contact at 011-41556527.

4812 Delhi based CA firm looking for pAN India expansion and inviting fresh/experienced CA for partnership and branch offices. Contact mr. Jain at 9899615888, [email protected].

4813 Assign/sub-contract audit/taxation work all over India to Chennai based CA firm. Contact: 98406 49930. e-mail: [email protected]

4814 Required Chartered Accountants on partnership/assignment/retainership/sub-contract/employment basis, semi-qualified and articled assistants (for the state of Jammu & Kashmir/northern states). send in your applications to: 4814, C/o Journal section, The Institute of Chartered Accountants of India, ICAI bhawan, A-94/4, sector-58, Noida-201301

4815 Kolkata based CA firm requires partner. Also interested for merger & networking. please send your CV and proposals at [email protected]

4816 A C.A. Firm having offices at mumbai, surat and Ahmedabad with well equipped infrastructure is in process of converting the firm into Limited Liability partnership [LLp], subject to the necessary amendments in the CA Act, 1949, and intend to open other branches in India and overseas. proposals are invited from small and medium size CA firms for merger/networking with proposed LLp. proposals from any city of India and Abroad are solicited. mail your proposal to [email protected] or call us on telephone no. 079 – 2646 4023/2640 3765.

Classifieds

15 Pune West CPE Study of the Institute of Chartered Accountants of India

11000.00

16 034625 CA. Rajesh Bhagat 10000.0017 035520 CA. Nihar N. Jambusaria 10000.0018 105591 CA. Dhiraj Khandelwal 10000.0019 085013 CA. Mahesh Agarwal 7600.0020 101499 CA. Shruti Jayesh Shah 5000.0021 043442 CA. Ashok Chand Jain 5000.00

CA. K. M. Agarwal CA. Jigyasa ChopraCA. Rajeev Kumar Chopra

494

ICAI NEWS


Payment of Annual Membership/Certifacte of Practice FeeFor The Year 2010-11

Campus Placement Programme for Newly Qualified Chartered Accountants August-September, 2010

the annual membership and Certificate of practice fees (if member holds certificate of practice) became due and payable on 1st April, 2010. Circulars advising members to pay the membership/certificate of practice fee were sent to individual members in the month of April, 2010 and published in may, 2010 issue of the Journal.

Attention of all those members who have still not paid the annual membership fee/certificate of practice fee by 31st July, 2010 is invited to pay the fees immediately so as to reach the concerned regional Office before 30th september, 2010.the non-payment of annual membership/certificate of practice fee will have the following consequences:

i) the member will not be eligible to use designatory letters ‘CA.’ as a prefix to the name and ‘ACA’/’FCA’ and designation ‘Chartered Accountant’.

ii) A member in practice will cease his right to practise as a Chartered Accountant.

iii) such a member will not be eligible to train articled/audit assistant already receiving training under him.

iv) the member will not be eligible to train any new

the CMII provides opportunity to the employers to interact with newly qualified Chartered Accountants thereby providing a cost effective mode of recruiting newly qualified Chartered Accountants. An organisation and firms of Chartered Accountants can participate in one or more centres.

Campus Interview Dates

MINISTRY OF CORPORATE AFFAIRSGOVERNMENT OF INDIA

Dear Corporates,As you are aware the last date for filing of your

company’s Annual return & balance sheet for the current year is round the corner. these documents have to be filed in electronic form online into the mCA21

articled/audit assistant.v) such a member will not be eligible to carry out audit/

certificate/attest and other functions in view of (i) & (ii) above.

members can also pay membership/COp fees by using the online facility available on the website. For the use of payment gateway, members are requested to log in through “Online services” link available on home page of the Institute’s website.

From this year onwards, the scheme of advance amount remittance has been introduced in place of advance payment of fee and the same can be referred in the Fee circular sent to all members.

For, any other clarification, members are advised to contact the concerned Decentralized Offices of the region.please pay your membership fee and avoid unwanted removal of your name.

“HELP US TO SERVE YOU BETTER”

Organisations intending to recruit Newly Qualified Chartered Accountants through the scheme are requested to get in touch with Committee for members in Industry, Indraprastha marg, New Delhi - 110002, tel. No. (011) 30110450/491 e-mail: [email protected], [email protected]; Fax- +91(11) 30110583.For full details, please log on to www.cmii.icai.org

Chairman, CMII

Centre Dates

ernakulam, Kanpur, Ludhiana and bhubaneswar

september 06 & 07, 2010

Coimbatore, Indore and Nagpur september 07 & 08, 2010

Ahmedabad, Jaipur and pune september 08, 09 & 10, 2010

portal. since the size of each document is huge (2mb or more), the last minute rush creates a congestion in the system which is then unable to process pending requests fast.

You are, therefore, requested to please file your e-forms due for the coming months of 2010 early, in order to avoid last minute system problems of heavy traffic on the mCA website/mCA 21 portal.

Annual Filing of Statutory Returns for the Year 2010

495

bangalore, Hyderabad and Kolkata september 15, 16, 17 & 18, 2010

mumbai, New Delhi and Chennai september 21, 22, 23, 24 & 25, 2010

ICAI NEWS


COMMON PROFICIENCY TEST (PAPER- PENCIl MODE) - DECEMbER, 2010 TO bE PUblISHED IN PART III SECTION 4 OF THE GAZETTE OF INDIA

NOTIFICATION 26th July, 2010

No.13-CA (eXAm)/Cpt/December/2010: - In pursuance of regulation 22 of the Chartered Accountants regulations, 1988, the Council of the Institute of Chartered Accountants of India is pleased to notify that the Common Proficiency Test (Paper- Pencil Mode) will be held on Sunday, 19th December, 2010 in two sessions as below, at the following centres provided that sufficient number of candidates offer themselves to appear from each centre.

[As per provisions of regulation 25 D (3) of the Chartered Accountants regulations, 1988 and the syllabus as published in the pages 291-293 of the Journal ‘the Chartered Accountant’ August 2006 issue and pages 12-13 of Chartered Accountants students’ Newsletter August 2006 issue.]

First Session (i.e. Morning Session) 10.30 AM to 12.30 PM (IST)

section - A Fundamentals of Accounting

section - b mercantile Laws

Second Session (i.e. Afternoon Session) 2.00 PM to 4.00 PM (IST)

section - C General economics

section - D Quantitative Aptitude

EXAMINATION CENTRES( IN INDIA):

1 AGrA 46 GOA 91 pANIpAt

2 AHmeDAbAD 47 GOrAKHpUr 92 pANVeL

3 AHmeDNAGAr 48 GUNtUr 93 pAtNA

4 AJmer 49 GUrGAON 94 pAtIALA

5 AKOLA 50 GUWAHAtI 95 pImprI-CHINCHWAD

6 ALAppUZHA 51 GWALIOr 96 pONDICHerrY

7 ALIGArH 52 HIsAr 97 pUNe

8 ALLAHAbAD 53 HUbLI 98 rAIpUr

9 ALWAr 54 HYDerAbAD 99 rAJAmAHeNDrAVArAm

10 AmbALA 55 INDOre 100 rAJKOt

11 AmrAVAtI 56 JAbALpUr 101 rANCHI

12 AmrItsAr 57 JAIpUr 102 rAtLAm

13 ANAND 58 JALANDHAr 103 reWArI

14 AsANsOL 59 JALGAON 104 rOHtAK

15 AUrANGAbAD 60 JAmmU 105 rOUrKeLA

16 bANGALOre 61 JAmNAGAr 106 sAHArANpUr

17 bAreILLY 62 JAmsHeDpUr 107 sALem

18 bAtHINDA 63 JODHpUr 108 sAmbALpUr

19 beAWAr 64 KANpUr 109 sANGLI

20 beLGAUm 65 KArNAL 110 sAtArA

21 beLLArY 66 KOLLAm 111 sHImLA

22 berHAmpOre 67 KOLHApUr 112 sIKAr

23 bHAGALpUr 68 KOLKAtA 113 sILIGUrI

24 bHArAUCH 69 KOtA 114 sOLApUr

25 bHAVNAGAr 70 KOttAYAm 115 sONepAt

26 bHILWArA 71 KOZHIKODe 116 srI GANGANAGAr

27 bHOpAL 72 KUmbAKONAm 117 sUrAt

496

ICAI NEWS


28 bHUbANesWAr 73 LAtUr 118 tHANe

29 bHUJ 74 LUCKNOW 119 tHIrUVANANtHApUrAm

30 bIKANer 75 LUDHIANA 120 tHrIssUr

31 bILAspUr 76 mADUrAI 121 tINsUKIA

32 CHANDIGArH 77 mANGALOre 122 tIrUCHIrApALLI

33 CHeNNAI 78 mAtHUrA 123 tIrUpAtI

34 COImbAtOre 79 meerUt 124 tIrUpUr

35 CUttACK 80 mOrADAbAD 125 tUtICOrIN

36 DeHrADUN 81 mUmbAI 126 UDAIpUr

37 DeLHI/NeW DeLHI 82 mUZAFFArNAGAr 127 UDUpI

38 DHANbAD 83 mYsOre 128 UJJAIN

39 DUNDLOD 84 NAGpUr 129 VADODArA

40 DUrG 85 NANDeD 130 VApI

41 erNAKULAm 86 NAsHIK 131 VArANAsI

42 erODe 87 NeLLOre 132 VeLLOre

43 FArIDAbAD 88 NOIDA 133 VIJAYAWADA

44 GANDHIDHAm 89 pALGHAt 134 VIsAKHApAtNAm

45 GHAZIAbAD 90 pALI mArWAr 135 YAmUNA NAGAr

Overseas Centres :- (1) AbU DHAbI (2) DUbAI (3) bAHrAIN (4) DOHA (5) KAtHmANDU

the Council reserves the right to withdraw any centre at any stage without assigning any reason.

Applications for admission to Common proficiency test is required to be made in the relevant prescribed form as contained in the Information brochure, which may be obtained from the Additional Secretary (Examinations), the Institute of Chartered Accountants of India, ICAI bhawan, Indraprastha marg, New Delhi – 110002 on payment of R600/-(R500/- towards examination fee and R100/- towards cost of application form and information brochure) per application form. the fee for candidates opting for Abu Dhabi , Dubai, Doha and bahrain centres will be Us $160 ( Us $ 150 towards examination fee and Us $ 10 towards cost of application form and information brochure) or its equivalent Indian currency. the fee for the candidates opting for Kathmandu centre are required to remit INr.950/-(INr 850/- towards examination fee and INr 100/- towards the cost of application form and information brochure) or its equivalent foreign currency. since the cost of Information brochure containing Common proficiency test application form includes the examination fee , no separate fee is required to be remitted at the time of submitting the filled in application form. the Information brochure containing Common proficiency test application form will also be available in the regional and branch Offices of the Institute and can be obtained there from on cash payment on or from 6th October, 2010.

Common proficiency test application forms duly filled in may be sent so as to reach the Additional secretary (examinations) at New Delhi not later than 27th October, 2010. Applications received after 27th October, 2010 shall not be entertained under any circumstances. Applications duly filled in will be received by hand delivery at the offices of Institute at New Delhi and at the Decentralised Offices of the Institute at mumbai, Chennai, Kolkata, Kanpur, Ahmedabad, bangalore, Hyderabad, Jaipur and pune upto 27th October, 2010. Candidates residing in these cities are advised to take advantage of this facility. It may be noted that there is no provision for acceptance of application forms after 27th October, 2010 with late fee.

Alternatively the candidate may fill up the examination application form online at http://icaiexam.icai.org from 6th October, 2010 (10:00 hrs) to 27th October, 2010 (17:30hrs) and remit the fee online by using credit card, either VIsA or master Card.

Common proficiency test (Cpt) is open only to those students who are already registered with the Institute of Chartered Accountants of India for the said course on or before 1st October, 2010 and fulfill the requisite eligibility conditions.

QUESTION PAPER bOOKlET lANGUAGE:Common proficiency test will be an objective type multiple choice questions based examination. Candidates will be allowed to opt for Hindi medium Question paper booklet for answering the questions. Detailed information will be found given in the Information brochure. (G. SOMASEKHAR) ADDITIONAL SECRETARY (EXAMS.)

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ICAI NEWS


No.SVAMF/AGM/49/2010 August 11, 2010

this is to inform you that as required under rule 27 of the

s.Vaidyanath Aiyar memorial Fund rules and regulations, the

49th Annual General meeting of the Fund will be held at 5.30 p.m.

on 21st september, 2010 in the office of the Institute of Chartered

Accountants of India, ICAI bhawan, Indraprastha marg, New

Delhi. In compliance with rule 28 of the said rules and

regulations, agenda for the meeting together with the report of

the managing Committee and statement of Accounts for the year

ending 31st march, 2010 will be placed on the table at the time of

meeting.

Note: I wish to add that under rule 37 of the said rules and

regulations, no member is entitled to any fee or traveling

expenses or other allowances for attending the meeting

whether annual or special.

You are requested to make it convenient to attend the

meeting.

sd/-

(CA s.C.Vasudeva)

member secretary

sVAmF

(Details of Agenda, Report of Managing Committee and

Financial Statements would be hosted on the Institute’s

website www.icai.org )

For kind attention of all members of the S.Vaidyanath Aiyar Memorial Fund

ICAI Job Portal( http://jobs4cas.icai.org)

ICAI Job portal for experienced Chartered Accountants and Accounting Technicians.

Objectives of ICAI Job portal the ICAI Job portal is primarily for experienced Chartered

Accountants and Accounting technicians. the said Job portal has been designed and developed to provide a platform for industry to fill their vacancies and chartered accountants to get fresh jobs. the benefits are as follows:• From Members Perspective:

a) to cater to the Career Advancement of the members in industry.

b) to provide a platform for members in practice who wish to switch over to service.

c) to provide career advancement services throughout the year.

• From Industry Perspective: a) to reinforce the image of the Institute as partner

in Nation building and to identify itself as a partner in industrial development through the provision of quality professionals.

b) to provide placement services throughout the year and fill their evolving manpower requirements.

c) to be a driver to the overall improvement of the various functional area of Industry.

d) to be a driver to develop world class Indian organisations.

• Features of the Job Portalsome of the prominent Features of this portal are as

follows:

For Employers:• Hot Vacancy-premium Job posting services• Advanced search tools• reach through Job Alerts• resume Database Access subscription• Unlimited writing for Job Advertisement• extremely fast display of Job Advertisement• Facility to monitor the activities done through the

Account.For Candidates:• Update Alert for CV• Job messenger• email Alerts• resume building services• Job search Facility on the basis of Functional

Area, Industry, experience, Locations, expected salary, Job type, Freshness, etc

• Covering Letter Option• Hot employer/preferred employer marking

facilitythe recruiting organizations as well as the experienced

Chartered Accountants and accounting technicians can avail the benefits of the ICAI Job portal. In case you need any assistance you may feel free to contact secretary to CmII at email: [email protected] , [email protected], tel: 011-30110450/491.

ChairmanCommittee for Members in Industry

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ICAI NEWS


No.CAbF/AGM/50/2010 August 11, 2010this is to inform you that as required under rule 28 of the Chartered

Accountants benevolent Fund rules and regulations, the 50th Annual General

meeting of the Fund will be held at 5:00 p.m. on 21st september, 2010 in

the office of the Institute of Chartered Accountants of India, ICAI bhawan,

Indraprastha marg, New Delhi. In compliance with rule 29 of the said rules and

regulations, agenda for the meeting together with the report of the managing

Committee and statement of Accounts for the year ending 31st march, 2010 will

be placed on the table at the time of meeting.

Note: I wish to add that under rule 38 of the said rules and regulation, no

member is entitled to any fee or traveling expenses or other allowances for

attending the meeting whether annual or special.

You are requested to make it convenient to attend the meeting.

sd/ -

(CA. N. D.Gupta)

member secretary

CAbF

(Details of Agenda, Report of Managing Committee and Financial

Statements would be hosted on the Institute’s website www.icai.org )

For kind attention of all members of the Chartered Accountants Benevolent Fund

499

THE COMMITEE ON PUblIC FINANCE AND GOVERNMENT ACCOUNTINGAccounting Reforms in India: A Bird’s Eye View

the Committee on public Finance &

Government Accounting of ICAI has prepared

a booklet on “Accounting reforms in India: A

bird’s eye View” with a view to provide explicit

guidance on achievements of accounting

reforms, roadblock in way for accounting

reforms, need to harmonise accounting

standards, conversion from cash to accrual

system and single to double entry book-keeping, implementation of accrual

accounting in Government and other related issues.

this is a non-priced publication of the Institute. In case the members would

like to have a copy of the booklet, they can write to the CpF&GA secretariat

at [email protected]. the booklet is also freely downloadable from the

URL: http://220.227.161.86/20163announ10956.pdf

NEW PUblICATIONS

ICAI NEWS


ICAI AWARDS FOR EXCEllENCE IN FINANCIAl REPORTINGInvitation to Participate in the Competition for the Year 2009-10

Last date for receipt of entries: 30th September, 2010

Objectiveto recognise and encourage excellence in the preparation and presentation of financial information.

Categories of the Awards

Category I banking sector

Category II Insurance sector

Category III manufacturing sector – (turnover equal to or more than R500 crore)

Category IV manufacturing sector – (turnover less than R500 crore)

500

Category V Infrastructure and Construction sector – (turnover equal to or more than R500 crore)

Category VI Infrastructure and Construction sector– (turnover less than R500 crore)

Category VII service sector (Other than banking and insurance) – (turnover equal to or more than R500 crore)

Category VIII

service sector (Other than banking and insurance) – (turnover less than R500 crore)

Category IX Not-for-profit sector

Category X Local bodies

NEW PUblICATIONS

INTERNAl AUDIT STANDARDS bOARDTechnical Guide on Internal Audit of Sugar Industry(pages: 60 + 18 initial pages+ 2 cover pages)Price: R120/- (including CD)

the Indian sugar industry is a key driver of rural deve-lopment, supporting India’s economic growth Internal audit can go a long way in helping sugar industry in improving their operational efficiency, increasing value for money and finally, their competitiveness, both in the domestic as well as in international markets. the Internal Audit standards board has recently issued “Technical Guide on Internal Audit of Sugar Industry” that primarily deals with the operational as well as internal audit aspects relevant to Indian sugar industry. Significant features of the Technical Guide are:• BriefoverviewofthesugarindustryinIndia.• Discusses major legislations governing the sugar

industry.• Explainsvariousprocessesinvolvedinsugarindustry, such as, sugarcane development and procurement,

manufacturing of sugar, and sales and marketing of sugar.

• Deals with the overall approach of internal audit withreference to standards on Internal Audit, and the procedures to be undertaken by the internal auditor with regard to peculiar aspects related to sugar industry.

• Provides guidance regarding internal audit of keyprocesses such as, cane survey, procurement process,

manufacturing process, sales and marketing process of sugar and also of distillery products.

• Deals with important internalcontrol aspects related to sugar industry.

• Includes glossary of termspeculiar to sugar industry.

• The Guide comes with aCD of the entire Guide to ensure ease of reference and reusability.

Ordering Information:the publication can be obtained from the sales counter at the regional Offices or at the Head Office of the Institute. Copies can also be obtained by post. to order by post, send a demand draft for the amount of price of the publication (add the charges indicated below for the desired mode of delivery) in favor of the “The Secretary, The Institute of Chartered Accountants of India, New Delhi”, payable at New Delhi, to the Postal Sales Department, the Institute of Chartered Accountants of India, A-94/4, Sector-58, Noida - 201301 - (U.P.).

Postal Charges:by Courier: Within Delhi : R20/- rest of India: R25/-by registered parcel: Within India : R36/-

ICAI NEWS


501

In a case, where an organisation is engaged in more than one business, the dominant source of revenue will determine the category to which the organisation belongs.

Awards Hall of Fame, to be awarded to the entity that has been winning the first prize under the same category continuously in the last five years.

One Gold shield and one silver shield will be awarded in each category for the best entry and the next best entry, respectively.

plaques to be awarded to the entities who are following better financial reporting practices amongst the remaining enterprises in each category after conferring Hall of Fame, Gold shield and silver shield.

Procedure for Participation1. there is no fee for participation in the competition.

2. Annual report relating to the financial year ending on any day between April 1, 2009 and march 31, 2010 (both days inclusive) is eligible for participation in this competition.

3. Decision of the panel of Judges in all the matters relating to the Competition will be final.

4. Fill in the entry Form and submit with requisite documents on or before september 30, 2010 to:the secretaryresearch Committeetechnical Directoratethe Institute of Chartered Accountants of IndiaICAI bhawan, Indraprastha margNew Delhi – 110 002

For further information please write to [email protected] or visit Institute’s website www.icai.org

Peer Review of the Audit Firms of the Listed Companies – Updation of the Peer Review Status

the peer review board of the Institute of Chartered Accountants of India (ICAI) is in process of updating the status of the firms. Accordingly the peer review board has desired to know the status regarding whether your firm has been peer reviewed in the past or whether peer review Certificate has already been issued to your firm for updation of the latest position regarding the status due to the migration of firms from the stage II to stage I and from stage III to stage II and stage I and vice-versa. In view of this therefore it is requested that the latest status of your firm i.e. in which stage your firm falls as per the stage wise coverage mentioned below which may kindly be send at email id [email protected] so as to expedite the peer review of the firms doing the audit of the listed companies which has been mandatory as per the Circular No. CIr/CFD/DIL/1/2010 dated April 5, 2010 issued by the security exchange board of India (sebI). Further the firms doing the audit of the listed companies who’s peer review process is not initiated by the board may also kindly send a request

for voluntary peer review to the peer review board. the stage wise coverage as per the statement on

peer review is as under: -

S No.

Stage of the firms

Firms covered under each Stage

1 stage I

(i) Central statutory Auditors of public sector banks, private sector banks, Foreign banks and public Financial Institutions;

(ii) Central statutory Auditors of Central and state public sector Undertakings and Central Cooperative societies based on criteria such as turnover or paid up capital etc. as may be decided by the board;

(iii) Central statutory Auditors of Insurance Companies;

(iv) Conducting audit of Companies ha-ving paid up capital of over R5 crore and an annual turnover of more than R50 crore and such other criteria as may be decided by the board;

ICAI NEWS


(v) Conducting audits or rendering attestation functions of asset management companies and mutual fund entities;

(vi) Conducting audit of enterprises whose equity or debt securities are listed in India or enterprises which are in the process of listing their equity or debt securities as evidenced by the board of directors’ resolution in this regard;

(vii) entities which have raised funds from banks/public/financial institutions of over rs. One crore at any time during the period covered by the review and satisfy such other criteria in this regard as the board may decide, as well as entities who have shown readiness to raise funds of the above amount or more as evidenced by their filing of prospectus.

2 stage II (i) branches of public sector banks;

(ii) branches of private sector and Foreign banks;

502

(iii) regional rural banks/Co-oper-ative banks;

(iv) Non-banking Financial Com-panies (NbFCs) which are not covered under Level I, based on such criteria as the board may decide;

(v) Companies having paid-up capital of R5 crore or less and such other criteria such as turnover etc. as may be decided by the board.

3. stage IIIstage III covers residuary firms which are

not covered in stage I and stage II

If you have any further queries, you may contact the secretary, peer review board, the Institute of Chartered Accountants of India, ICAI bhawan, Indraprastha marg, New Delhi – 110 002, tel – 011-30110469/497/452, e-mail. [email protected]

Invitation to be a part of the Institute’s Vision-2021

the Vision & perspective planning Committee of the Institute is currently engaged in the historic exercise of drafting the Vision Document for the Institute and the profession of Chartered Accountancy leading to the excellence position by the year 2021.

the Committee had organized Interactive Workshops at 18 regions across the country, namely, Coimbatore, Lucknow, Noida, Nasik, Nagpur, Jaipur, Ahemadabad, baroda, bhopal, bhubaneswar, ernakulam, Faridabad, Gurgaon, Guwahati, Hyderabad, Jalandhar, Kolkata and mangalore, wherein the elite resourceful people from the various sectors of the economy, who are the users of the services of Chartered Accountants, including Chartered Accountants from industry (CeOs and CFOs), Chartered Accountants from service (at key positions) alongwith senior and present Council members (central, regional and branch level) were invited to discuss and deliberate upon certain vital issues and aspects having an impact or expected

to have an impact on the profession in current and coming times.

Great enthusiasm and active participation was noticed in these workshops and the vital inputs gathered through these workshops are expected to lead to a practical and more realistic Vision statement for the profession as well as Institute. In order to make the vision development process more participative and to develop a shared vision for the profession, the members of the Institute are invited to become a part of this gigantic exercise and helping us achieve a shared Vision for the profession. the members may freely provide their inputs/suggestions for drafting the Vision Document by following the link: http://www.icai.org/icaivision.html directly, or, otherwise, the link is also available on the homepage of the Institute by 15th September 2010.

ChairmanVision and Perspective Planning Committee

GENERAL


Spirituality for a Chartered Accountant

Every profession has its specialty. Our profession has two specialties: one, it handles the most sensitive issue, i.e. money, and two, it never ends, i.e. there is no cut-off time, as it is an ongoing process. Try to understand, a barber, for example, is done with as he finishes a hair-cut, but a CA is always in the mid-stream of his never-ending work. Spirituality is relaxation; it is the relaxing gap that is the source, the end and the in-between of any activity. If one understands or rather feels this gap, it can be really the starting point, in-between access point and end point of work. If practiced sincerely, this relaxation works as the background for the entire work people do and brings creativity, relaxation and enjoyment in whatever they do.

The Starting PointA few years back, my mother used to go for spiritual discourses. Once I asked her to ask her Guru a question who is really running this world – money or God. I gave this question to her in writing and then added: If God is running the show then what is the point in doing the Sadhana? Let Him handle everything and we will align ourselves to whatever is happening. And if money is running the world, why aren’t we after money than the God? she never took the question to her Guru saying that that would be a sacrilege, i.e. an irreligious act.

However, that question was so relevant to me that whatever I was doing, the question would pop up and distract me. Others may feel the same.

so, finally it was time to find the answer within. In fact, this is how spirituality generally gets started.

The ProfessionOur work occupies our life. In fact, life is not a long story made of so many years. It is one day multiplied so many times. At any given time, real life spreads over just one day. to make it simple, it is the composition of a day that decides the quality of our life. since the prime time of the day and the very orientation of the day is work, work occupies our life and decides how much we will enjoy it. that is why the way we handle and enjoy our work will decide whether we enjoy our life.

to handle any work efficiently, apart from the skill, there is one very basic

CA. Sanjay Manohar Kshirsagar (The author is a member of the Institute. He can be reached at [email protected].)

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GENERAL


factor: detachment from the subject handled. Let us understand this:

A surgeon can perform a surgery successfully undoubtedly because of her/his skills, but the basic role is that of her/his detachment from the person she/he is operating upon. It is said that surgeons, however efficient and skilled, cannot operate their loved ones, e.g. own wives or children. At the very start of the legendary Bhagawad Gita, Arjuna’s grief has been described, as despite being a world-class archer and warrior, he is not ready to start the fight and finds himself unable to perform, as he feels attachment to his enemy, i.e. they were all his kith and kin. Although this appears to be far-fetched reality in our day-to-day life and we may find it out of context, but the point this

Utility of money cannot be denied as a concept, but

we are almost focused on a single factor. That is why we are not aware of the mystery of life. The sun will shine, the earth will rotate, the stars will fill the sky, the trees will grow, the rains will pour and the hearts will beat without money. The life around us is a beautiful reality. It is run by some unknown cosmic intelligence that is a relaxed phenomenon and the only way to fall in tune with it is to relax. The need is to change our focus from money to relaxation and this relaxation will be the starting point, in-between access and end point of all works we do. It will be a background to all our activities. We will become more creative, more effective and more grateful to the life.

underlines is attachment to subject that really holds good all the time and in all dimensions of life.

the point here is what we are handling is a very sensitive subject, i.e. money, and if we can be detached about it. Again, let us understand that CAs are all smart enough to acquire any skill they perform for the third time. We are all now proficient in e-filing of Income tax returns within a span of three years. so, skill is important but a secondary issue in this context. We can be skilled in any area we take interest in. but it is the detachment that matters. to be exact, if we are detached and skilled, we will enjoy the activity, rather it will not leave any mark on us when we have finished.

Here, let us understand it from Lord buddha who had very intelligently given the criteria of right work and right food, i.e. samyak kriya and samyak aahar; he says that if our state of mind after work remains the same as it was before we started, we have done the work rightly. What he means is, after completion of the work, we should feel as light as we were before starting the work. the same rule, i.e. rule of samyakatv, applies to eating too that if we feel the same before and after eating our food, we have eaten rightly. this single criterion of Samyakatv is relevant to both most important aspects of life, eating and work; because with this criterion, we can always decide when to stop and we can then really enjoy both eating and work. both have a physical as well as a psychological aspect. It is remarkable how buddha intelligently defines a singly criterion following which we will never overeat or overwork and we will always move in right direction when accepting and doing the work.

Detachmentso, the real criterion for enjoyment

is lightness before, during and after the work. We can acquire any skill in any

area we take interest in. What it actually requires is time and an openness to learn. As we qualify for the CA profession, we prove our intelligence to the world. Next, we should try to understand the detachment aspect of work.

time doesn’t have an absolute identity. It is a convenience and it helps us in organizing our life. but, still, it is a concept. We don’t stop working and our work becomes light. We can take the work easy and we become more efficient. When the subject we are handling is understood as a concept, we are ready to accept the outcome whichever way it comes. We become interested in the process, rather than the end and the work becomes easy. money is a concept and not a reality – with this understanding, CAs can be more efficient. they are serious because money is a reality for them like everyone’s case. but they should know that it is a concept to handle their work lightly and efficiently. the detachment will come only when we come to know that what we are handling is a concept and not a reality.

Something more about DetachmentLet us try to understand this central issue in life a little more. there are two things in life, we and things and people around us. In order to run our life smoothly,

In fact, life is not a long story made of so many years. It is

one day multiplied so many times. At any given time, real life spreads over just one day. To make it simple, it is the composition of a day that decides the quality of our life. Since the prime time of the day and the very orientation of the day is work, work occupies our life and decides how much we will enjoy it.

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GENERAL


society has evolved some concepts and, to make them functional, all of us have agreed upon them. For example, as mentioned earlier, time is a concept which we use to manage events but when we use the concept quite often it starts appearing to be a reality. It will not be easy for anyone to agree that time is a concept. but let us imagine, we have traveled vertically towards the sky. We will find that time is created by the rotation of earth otherwise the sun is always shining. the point is that if a concept has become a reality for us, we are very much likely to get attached to it and this creates a tension. For example, if we are taking time to be real, we will always be under pressure and we will create a personality around it depending upon our past performance about meeting the time schedules. Now, this has become an attachment with time and the attachment works both ways whether we may consider ourselves to be punctual. Next time, we want to meet a schedule we will be either excited to meet it as a punctual person, or, tense to avoid the failure if we think ourselves to be unpunctual. In either case, we will be tense because we have taken time to be real.

so, what is to be understood is we are there and time is there, if we create a bridge between the two; that illusionary

bridge is attachment. Attachment is a rainbow like bridge. We just see its futility and it takes us nowhere and our very understanding fades it away.

Detachment vs. CarelessnessCarelessness comes when we are ungrateful to what we are doing and when we dislike our work.

Let us try to understand this. When CAs qualify their course and start practicing, some of them may find their work uncreative and hence become unhappy. If we feel this way, we will be disinterested in the work and the work

will become heavy. We will then want to avoid it and carelessness will follow. It is human psychology that all work in this world is neutral and it is us who make it interesting. It is our attitude towards the work that interacts with the work to give us joy. It is not that singing or playing an instrument brings happiness, it is us who bring happiness in singing or playing an instrument. It is because a singer or an instrumentalist is happy, the song or the concert becomes joyous. Any activity per se is neutral. It is the performer who brings colors to it.

so, it is our attitude that decides whether we will be interested in the work. the nature of profession is not the issue it is our attitude towards the profession that will decide whether we will enjoy it or not. so, we rule out the possibility of becoming careless when we understand detachment because that is always the basic confusion. If we really want to enjoy the work we have to be detached and still caring because a work where we are not interested can bring us money but not happiness.

Let us take it further. If we develop this attitude of becoming disinterested, whatever we take up, sooner or later, we will find it boring not because of the work but because of the absence of our interest in that. to be interested

We don’t stop working and our work becomes

light. We can take the work easy and we become more efficient. When the subject we are handling is understood as a concept, we are ready to accept the outcome whichever way it comes. We become interested in the process, rather than the end and the work becomes easy. Money is a concept and not a reality – with this understanding, CAs can be more efficient.

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GENERAL


and careless at the same time is not possible and it is our interest that makes anything interesting. When King Akbar expressed how salim’s fiancée Anarkali was worthy to be so great, salim replied: to know the beauty of Anarkali one requires the eyes of salim. What was meant is that it is us who bring beauty to what or who we love.

MoneyAs CAs, we know what money is and understand its power. the whole social orientation is towards the money. Nothing moves in this world without money. Imagine if there is no possibility of making money, would any one start from home? but money is just a concept like time. While it has utility, it is not a reality. the power money seems to be having is only because of

its universal acceptance as powerful. We can not tell our clients that money is a concept. they consider it to be a reality that is why they come to us. but we should understand that we are handling a concept and this will remove our attachment to money. It is guaranteed that our entire approach to profession will change and all our tension will disappear. We will be lighter and very very effective.

Who is really running the world?this is a little deeper inquiry. It requires a more relaxed state of mind to understand. the more our attachments are removed we will have better relaxation to understand.

Let us try to understand why we all believe that money runs the world. We believe that we are alive because we eat and, to buy food, we need money, so, there is an all-over acceptance that if we don’t have money we will not exist. this is the basic fear behind our belief that it’s money that makes the mare go. Utility of money is to provide food, shelter and clothing, and other comforts come next. Whenever we get an opportunity to sit silently and relax, we should just feel for ourselves.

It’s not food but breathing that keeps everything going. Although all of us know this, we ignore that breathing is primary. We go to the extent of taking it for granted. It is the most mysterious thing in life and it can stop any time.

people may feel that breathing goes on because we eat. but the reality is completely reverse: breathing is completely out of our control. It helps the body to do everything. this we come to know probably at our last breath. the breath goes on because of so many complex factors that are beyond our grasp. For example, we can breathe because the trees are breathing and both breathe because the earth is rotating (otherwise it would burn off). Again, there is life on the earth, because the sun is shining. We do not know why the sun is shining. even if we know it, we won’t be in a position to do anything about it. this is such a complex issue.

Utility of money can not be denied as a concept, but we are almost focused on a single factor. that is why we are not aware of the mystery of life. the sun will shine, the earth will rotate, the stars will fill the sky, the trees will grow, the rains will pour and the hearts will beat without money. the life around us is a beautiful reality. It is run by some unknown cosmic intelligence that is a relaxed phenomenon and the only way to fall in tune with it is to relax.

the need is to change our focus from money to relaxation and this relaxation will be the starting point, in-between access and end point of all works we do. It will be a background to all our activities. We will become more creative, more effective and more grateful to the life. n

The whole social orientation is towards the

money. Nothing moves in this world without money. Imagine if there is no possibility of making money, would any one start from home? But money is just a concept like time. While it has utility, it is not a reality. The power money seems to be having is only because of its universal acceptance as powerful.

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EXPOSURE DRAFT


IntroductionScope of this SAE1. This Standard on Assurance Engagements (SAE) deals with assurance engagements undertaken by a professional accountant in public practice2 to provide a report for use by user entities and their auditors on the controls at a service organisation that provides a service to user entities that is likely to be relevant to user entities’ internal control as it relates to financial reporting. It complements SA 4023, in that reports prepared in accordance with this SAE are capable of providing appropriate evidence under SA 402. (Ref: Para. A1)2. The “Framework for Assurance Engagements” states that an assurance engagement may be a “reasonable assurance” engagement or a “limited assurance” engagement; that an assurance engagement may be either an “assertion-based” engagement or a “direct reporting” engagement; and, that the assurance conclusion for an assertion-based engagement can be worded either in terms of the responsible party’s assertion or directly in terms of the subject matter and the criteria4. This SAE only deals with assertion-based engagements that convey reasonable assurance, with the assurance conclusion worded directly in terms of the subject matter and the criteria5.3. This SAE applies only when the service organisation is responsible for, or otherwise able to make an assertion about, the suitable design of controls. This SAE does

not deal with assurance engagements:(a) To report only on whether controls at

a service organisation operated as described, or

(b) To report only on controls at a service organisation other than those related to a service that is likely to be relevant to user entities’ internal control as it relates to financial reporting (for example, controls that affect user entities’ production or quality control).

This SAE, however, provides some guidance for such engagements carried out under proposed SAE 30006. (Ref: Para. A2)4. In addition to issuing an assurance report on controls, a service auditor may also be engaged to provide reports such as the following, which are not dealt with in this SAE:(a) A report on a user entity’s transactions

or balances maintained by a service organisation; or

(b) An agreed-upon procedures report on controls at a service organisation.

Relationship with Other Professional Pronouncements5. The performance of assurance engagements other than audits or reviews of historical financial information requires the service auditor to comply with proposed SAE 3000. Proposed SAE 3000 includes requirements in relation to such topics as engagement acceptance, planning, evidence, and documentation that apply to all assurance engagements,

including engagements in accordance with this SAE. This SAE expands on how proposed SAE 3000 is to be applied in a reasonable assurance engagement to report on controls at a service organisation. The Assurance Framework, which defines and describes the elements and objectives of an assurance engagement, provides the context for understanding this SAE and proposed SAE 3000.6. Compliance with proposed SAE 3000 requires, among other things, that the service auditor comply with the Code of Ethics of the Institute of Chartered Accountants of India, and implement quality control procedures that are applicable to the individual engagement7.

Effective Date7. This SAE is effective for service auditors’ assurance reports covering periods ending on or after …………………………………..

Objectives8. The objectives of the service auditor are:(a) To obtain reasonable assurance about

whether, in all material respects, based on suitable criteria:(i) The service organisation’s description

of its system fairly presents the system as designed and implemented throughout the specified period (or in the case of a Type 1 Report, as at a specified date);

(ii) The controls related to the control objectives stated in the service

Standard on Assurance Engagements (SAE) 3402, “Assurance Reports on Controls at a Service Organisation”, should be read in the context of the “Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and Related Services”1.

1 Published in the July, 2007 issue of the Journal.2 As per the Framework for Assurance Engagements, issued by the Institute of Chartered Accountants of India, the term “professional accountant in

public practice (practitioner)” refers to the member of the Institute of Chartered Accountants of India who is in practice in terms of section 2 of the Chartered Accountants Act, 1949. The term is also used to refer to a firm of chartered accountants in public practice.

3 SA 402 (Revised), “Audit Considerations Relating to an Entity Using a Service Organization”.4 Framework for Assurance Engagements, paragraphs 9, 10 and 56.5 Paragraphs 13 and 52(k) of this SAE.6 Proposed SAE 3000, “Assurance Engagements Other than Audits or Reviews of Historical Financial Information”.7 Proposed SAE 3000, paragraphs 4 and 6.

Standard on Assurance Engagements (SAE) 3402Assurance Reports on Controls At a Service Organisation

Your comments on this Exposure Draft should reach us by September 30, 2010. Comments are most helpful if they indicate the specific paragraph(s) to which they relate, contain a clear rationale and, where applicable, provide a suggestion for alternative wording. The comments should be sent to:

Secretary, Auditing and Assurance Standards BoardThe Institute of Chartered Accountants of India

ICAI Bhawan, A -94/4, Sector-58, Noida – 201 301,Uttar Pradesh.

Comments can also be e-mailed at: [email protected]

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organisation’s description of its system were suitably designed throughout the specified period (or in the case of a Type 1 Report, as at a specified date);

(iii) Where included in the scope of the engagement, the controls operated effectively to provide reasonable assurance that the control objectives stated in the service organisation’s description of its system were achieved throughout the specified period.

(b) To report on the matters in (a) above in accordance with the service auditor’s findings.

Definitions9. For purposes of this SAE, the following terms have the meanings attributed below:(a) Carve-out method Method of dealing with the services

provided by a subservice organisation, whereby the service organisation’s description of its system includes the nature of the services provided by a subservice organisation, but that subservice organisation’s relevant control objectives and related controls are excluded from the service organisation’s description of its system and from the scope of the service auditor’s engagement. The service organisation’s description of its system and the scope of the service auditor’s engagement include controls at the service organisation to monitor the effectiveness of controls at the subservice organisation, which may include the service organisation’s review of an assurance report on controls at the subservice organisation.

(b) Complementary user entity controls Controls that the service organisation

assumes, in the design of its service, will be implemented by user entities, and which, if necessary to achieve control objectives stated in the service organisation’s description of its system, are identified in that description.

(c) Control objective The aim or purpose of a particular

aspect of controls. Control objectives relate to risks that controls seek to mitigate.

(d) Controls at the service organisation Controls over the achievement of a

control objective that is covered by the service auditor’s assurance report. (Ref: Para. A3)

(e) Controls at a subservice organisation Controls at a subservice organisation

to provide reasonable assurance about the achievement of a control objective.

(f) Criteria Benchmarks used to evaluate or

measure a subject matter including, where relevant, benchmarks for presentation and disclosure.

(g) Inclusive method Method of dealing with the services

provided by a subservice organisation, whereby the service organisation’s description of its system includes the nature of the services provided by a subservice organisation, and that subservice organisation’s relevant control objectives and related controls are included in the service organisation’s description of its system and in the scope of the service auditor’s engagement. (Ref: Para. A4)

(h) Internal audit function An appraisal activity established or

provided as a service to the service organisation. Its functions include, amongst other things, examining, evaluating and monitoring the adequacy and effectiveness of internal control.

(i) Internal auditors Those individuals who perform the

activities of the internal audit function. Internal auditors may belong to an internal audit department or equivalent function.

(j) Report on the description and design of controls at a service organisation (referred to in this SAE as a “Type 1 Report”) A report that comprises:

(i) The service organisation’s description of its system;

(ii) A written assertion by the service organisation that, in all material respects, and based on suitable criteria:a. The description fairly presents

the service organisation’s system as designed and implemented as at the specified date;

b. The controls related to the control objectives stated in the service organisation’s description of its system were suitably designed as at the specified date; and

(iii) A service auditor’s assurance report that conveys reasonable assurance about the matters in (ii)a.-b. above.

(k) Report on the description, design and operating effectiveness of controls at a service organisation (referred to in this SAE as a “Type 2 Report”) A report that comprises:

(i) The service organisation’s description of its system;

(ii) A written assertion by the service organisation that, in all material respects, and based on suitable criteria:a. The description fairly presents

the service organisation’s system as designed and implemented throughout the specified period;

b. The controls related to the control objectives stated in the service organisation’s description of its system were suitably designed throughout the specified period; and

c. The controls related to the control objectives stated in the service organisation’s description of its system operated effectively throughout the specified period; and

(iii) A service auditor’s assurance report that:a. Conveys reasonable assurance

about the matters in (ii)a.-c. above; and

b. Includes a description of the tests of controls and the results thereof.

(l) Service auditor A professional accountant in public

practice who, at the request of the service organisation, provides an assurance report on controls at a service organisation.

(m) Service organisation A third-party organisation (or segment

of a third-party organisation) that provides services to user entities that are likely to be relevant to user entities’ internal control as it relates to financial reporting.

(n) Service organisation’s system (or the system) The policies and procedures designed

and implemented by the service organisation to provide user entities with the services covered by the service auditor’s assurance report. The service organisation’s description of its system includes identification of: the services covered; the period, or in the case of a Type 1 Report, the date, to which the description relates; control objectives; and related controls.

(o) Service organisation’s assertion The written assertion about the matters

referred to in paragraph 9(k)(ii) (or paragraph 9(j)(ii) in the case of a Type 1 Report).

(p) Subservice organisation A service organisation used by another

service organisation to perform some of the services provided to user entities that are likely to be relevant to user entities’ internal control as it relates to financial reporting.

(q) Test of controls A procedure designed to evaluate the

operating effectiveness of controls in achieving the control objectives stated

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in the service organisation’s description of its system.

(r) User auditor An auditor who audits and reports

on the financial statements of a user entity8.

(s) User entity An entity that uses a service

organisation.

RequirementsProposed SAE 300010. The service auditor shall not represent compliance with this SAE unless the service auditor has complied with the requirements of this SAE and proposed SAE 3000.Ethical Requirements11. The service auditor shall comply with relevant ethical requirements, including those pertaining to independence, relating to assurance engagements. (Ref: Para. A5)Management and Those Charged with Governance12. Where this SAE requires the service auditor to inquire of, request representations from, communicate with, or otherwise interact with the service organisation, the service auditor shall determine the appropriate person(s) within the service organisation’s management or governance structure with whom to interact. This shall include consideration of which person(s) have the appropriate responsibilities for and knowledge of the matters concerned.(Ref: Para. A6)Acceptance and Continuance13. Before agreeing to accept, or continue, an engagement the service auditor shall:(a) Determine whether:

(i) The service auditor has the capabilities and competence to perform the engagement; (Ref: Para. A7)

(ii) The criteria to be applied by the service organisation to prepare the description of its system will be suitable and available to user entities and their auditors; and

(iii) The scope of the engagement and the service organisation’s description of its system will not be so limited that they are unlikely to be useful to user entities and their auditors.

(b) Obtain the agreement of the service organisation that it acknowledges and understands its responsibility:(i) For the preparation of the

description of its system, and accompanying service organisation’s assertion, including the completeness, accuracy and method of presentation of that description and assertion; (Ref:

Para. A8)(ii) To have a reasonable basis for the

service organisation’s assertion accompanying the description of its system; (Ref: Para. A9)

(iii) For stating in the service organisation’s assertion the criteria it used to prepare the description of its system;

(iv) For stating in the description of its system:a. The control objectives; and,b. Where they are specified by law

or regulation, or another party (for example, a user group or a professional body), the party who specified them;

(v) For identifying the risks that threaten achievement of the control objectives stated in the description of its system, and designing and implementing controls to provide reasonable assurance that those risks will not prevent achievement of the control objectives stated in the description of its system, and therefore that the stated control objectives will be achieved; and (Ref: Para. A10)

(vi) To provide the service auditor with:a. Access to all information, such

as records, documentation and other matters, including service level agreements, of which the service organisation is aware that is relevant to the description of the service organisation’s system and the accompanying service organisation’s assertion;

b. Additional information that the service auditor may request from the service organisation for the purpose of the assurance engagement; and

c. Unrestricted access to persons within the service organisation from whom the service auditor determines it necessary to obtain evidence.

Acceptance of a Change in the Terms of the Engagement14. If the service organisation requests a change in the scope of the engagement before the completion of the engagement, the service auditor shall be satisfied that there is a reasonable justification for the change. (Ref: Para. A11-A12)

Assessing the Suitability of the Criteria15. As required by proposed SAE 3000, the service auditor shall assess whether the service organisation has used suitable criteria in preparing the description of its

system, in evaluating whether controls are suitably designed, and, in the case of a Type 2 Report, in evaluating whether controls are operating effectively9.16. In assessing the suitability of the criteria to evaluate the service organisation’s description of its system, the service auditor shall determine if the criteria encompass, at a minimum: (a) Whether the description presents how

the service organisation’s system was designed and implemented, including, as appropriate:(i) The types of services provided,

including, as appropriate, classes of transactions processed;

(ii) The procedures, within both information technology and manual systems, by which services are provided, including, as appropriate, procedures by which transactions are initiated, recorded, processed, corrected as necessary, and transferred to the reports and other information prepared for user entities;

(iii) The related records and supporting information, including, as appropriate, accounting records, supporting information and specific accounts that are used to initiate, record, process and report transactions; this includes the correction of incorrect information and how information is transferred to the reports and other information prepared for user entities;

(iv) How the service organisation’s system deals with significant events and conditions, other than transactions;

(v) The process used to prepare reports and other information for user entities;

(vi) The specified control objectives and controls designed to achieve those objectives;

(vii) Complementary user entity controls contemplated in the design of the controls; and

(viii) Other aspects of the service organisation’s control environment, risk assessment process, information system (including the related business processes) and communication, control activities and monitoring controls that are relevant to the services provided.

(b) In the case of a Type 2 Report, whether the description includes relevant details of changes to the service organisation’s system during the period covered by

8 In the case of a subservice organization, the service auditor of a service organization that uses the services of the subservice organization is also a user auditor.

9 Proposed SAE 3000, paragraph 19.

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the description.(c) Whether the description omits or

distorts information relevant to the scope of the service organisation’s system being described, while acknowledging that the description is prepared to meet the common needs of a broad range of user entities and their auditors and may not, therefore, include every aspect of the service organisation’s system that each individual user entity and its auditor may consider important in its particular environment.

17. In assessing the suitability of the criteria to evaluate the design of controls, the service auditor shall determine if the criteria encompass, at a minimum, whether:(a) The service organisation has identified

the risks that threaten achievement of the control objectives stated in the description of its system; and

(b) The controls identified in that descri-ption would, if operated as described, provide reasonable assurance that those risks do not prevent the stated control objectives from being achieved.

18. In assessing the suitability of the criteria to evaluate the operating effectiveness of controls in providing reasonable assurance that the stated control objectives identified in the description will be achieved, the service auditor shall determine if the criteria encompass, at a minimum, whether the controls were consistently applied as designed throughout the specified period. This includes whether manual controls were applied by individuals who have the appropriate competence and authority.(Ref: Para. A13-A15)

Materiality19. When planning and performing the engagement, the service auditor shall consider materiality with respect to the fair presentation of the description, the suitability of the design of controls and, in the case of a Type 2 Report, the operating effectiveness of controls. (Ref: Para. A16-A18)

Obtaining an Understanding of the Service Organisation’s System20. The service auditor shall obtain an understanding of the service organisation’s system, including controls that are included in the scope of the engagement. (Ref: Para. A19-A20)

Obtaining Evidence Regarding the Description21. The service auditor shall obtain and read the service organisation’s description of its system, and shall evaluate whether those aspects of the description included

in the scope of the engagement are fairly presented, including whether: (Ref: Para. A21-A22)(a) Control objectives stated in the service

organisation’s description of its system are reasonable in the circumstances; (Ref: Para. A23)

(b) Controls identified in that description were implemented;

(c) Complementary user entity controls, if any, are adequately described; and

(d) Services performed by a subservice organisation, if any, are adequately described, including whether the inclusive method or the carve-out method has been used in relation to them.

22. The service auditor shall determine, through other procedures in combination with inquiries, whether the service organisation’s system has been implemented. Those other procedures shall include observation, and inspection of records and other documentation, of the manner in which the service organisation’s system operates and controls are applied. (Ref: Para. A24)

Obtaining Evidence Regarding Design of Controls23. The service auditor shall determine which of the controls at the service organisation are necessary to achieve the control objectives stated in the service organisation’s description of its system, and shall assess whether those controls were suitably designed. This determination shall include: (Ref: Para. A25-A27)(a) Identifying the risks that threaten the

achievement of the control objectives stated in the service organisation’s description of its system; and

(b) Evaluating the linkage of controls identified in the service organisation’s description of its system with those risks.

Obtaining Evidence Regarding Operating Effectiveness of Controls24. When providing a Type 2 Report, the service auditor shall test those controls that the service auditor has determined are necessary to achieve the control objectives stated in the service organisation’s description of its system, and assess their operating effectiveness throughout the period. Evidence obtained in prior engagements about the satisfactory operation of controls in prior periods does not provide a basis for a reduction in testing, even if it is supplemented with evidence obtained during the current period. (Ref: Para. A28-A32)25. When designing and performing tests of controls, the service auditor shall:(a) Perform other procedures in

combination with inquiry to obtain evidence about:(i) How the control was applied;(ii) The consistency with which the

control was applied; and(iii) By whom or by what means the

control was applied;(b) Determine whether controls to be

tested depend upon other controls (indirect controls) and, if so, whether it is necessary to obtain evidence supporting the operating effectiveness of those indirect controls; and (Ref: Para. A33-A34)

(c) Determine means of selecting items for testing that are effective in meeting the objectives of the procedure. (Ref: Para. A35-A36)

26. When determining the extent of tests of controls, the service auditor shall consider matters including the characteristics of the population to be tested, which includes the nature of controls, the frequency of their application (for example, monthly, daily, a number of times per day), and the expected rate of deviation.Sampling27. When the service auditor uses sampling, the service auditor shall: (Ref: Para. A35-A36)(a) Consider the purpose of the procedure

and the characteristics of the population from which the sample will be drawn when designing the sample;

(b) Determine a sample size sufficient to reduce sampling risk to an appropriately low level;

(c) Select items for the sample in such a way that each sampling unit in the population has a chance of selection;

(d) If a designed procedure is not applicable to a selected item, perform the procedure on a replacement item; and

(e) If unable to apply the designed procedures, or suitable alternative procedures, to a selected item, treat that item as a deviation.

Nature and Cause of Deviations28. The service auditor shall investigate the nature and cause of any deviations identified and shall determine whether:(a) Identified deviations are within the

expected rate of deviation and are acceptable; therefore, the testing that has been performed provides an appropriate basis for concluding that the control is operating effectively throughout the specified period;

(b) Additional testing of the control or of other controls is necessary to reach a conclusion on whether the controls relative to a particular control objective are operating effectively throughout the specified period; or (Ref: Para. A25)

(c) The testing that has been performed

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provides an appropriate basis for concluding that the control did not operate effectively throughout the specified period.

29. In the extremely rare circumstances when the service auditor considers a deviation discovered in a sample to be an anomaly and no other controls have been identified that allow the service auditor to conclude that the relevant control objective is operating effectively throughout the specified period, the service auditor shall obtain a high degree of certainty that such deviation is not representative of the population. The service auditor shall obtain this degree of certainty by performing additional procedures to obtain sufficient appropriate evidence that the deviation does not affect the remainder of the population.

The Work of an Internal Audit Function10 Obtaining an Understanding of the Internal Audit Function30. If the service organisation has an internal audit function, the service auditor shall obtain an understanding of the nature of the responsibilities of the internal audit function and of the activities performed in order to determine whether the internal audit function is likely to be relevant to the engagement. (Ref: Para. A37)Determining Whether and to What Extent to Use the Work of the Internal Auditors31. The service auditor shall determine:(a) Whether the work of the internal

auditors is likely to be adequate for purposes of the engagement; and

(b) If so, the planned effect of the work of the internal auditors on the nature, timing or extent of the service auditor’s procedures.

32. In determining whether the work of the internal auditors is likely to be adequate for purposes of the engagement, the service auditor shall evaluate:(a) The objectivity of the internal audit

function;(b) The technical competence of the

internal auditors;(c) Whether the work of the internal

auditors is likely to be carried out with due professional care; and

(d) Whether there is likely to be effective communication between the internal auditors and the service auditor.

33. In determining the planned effect of the work of the internal auditors on the nature, timing or extent of the service auditor’s procedures, the service auditor shall consider: (Ref: Para. A38)(a) The nature and scope of specific work

performed, or to be performed, by the

internal auditors;(b) The significance of that work to the

service auditor’s conclusions; and(c) The degree of subjectivity involved in

the evaluation of the evidence gathered in support of those conclusions.

Using the Work of the Internal Audit Function34. In order for the service auditor to use specific work of the internal auditors, the service auditor shall evaluate and perform procedures on that work to determine its adequacy for the service auditor’s purposes. (Ref: Para. A39)35. To determine the adequacy of specific work performed by the internal auditors for the service auditor’s purposes, the service auditor shall evaluate whether:(a) The work was performed by internal

auditors having adequate technical training and proficiency;

(b) The work was properly supervised, reviewed and documented;

(c) Adequate evidence has been obtained to enable the internal auditors to draw reasonable conclusions;

(d) Conclusions reached are appropriate in the circumstances and any reports prepared by the internal auditors are consistent with the results of the work performed; and

(e) Exceptions relevant to the engagement or unusual matters disclosed by the internal auditors are properly resolved.

Effect on the Service Auditor’s Assurance Report36. If the work of the internal audit function has been used, the service auditor shall make no reference to that work in the section of the service auditor’s assurance report that contains the service auditor’s opinion. (Ref: Para. A40)37. In the case of a Type 2 Report, if the work of the internal audit function has been used in performing tests of controls, that part of the service auditor’s assurance report that describes the service auditor’s tests of controls and the results thereof shall include a description of the internal auditor’s work and of the service auditor’s procedures with respect to that work. (Ref: Para. A41)

Written Representations38. The service auditor shall request the service organisation to provide written representations: (Ref: Para. A42)(a) That reaffirm the assertion

accompanying the description of the system;

(b) That it has provided the service auditor with all relevant information and access agreed to;11 and

(c) That it has disclosed to the service auditor any of the following of which it is aware:(i) Non-compliance with laws and

regulations, fraud, or uncorrected deviations attributable to the service organisation that may affect one or more user entities;

(ii) Design deficiencies in controls;(iii) Instances where controls have not

operated as described; and(iv) Any events subsequent to the

period covered by the service organisation’s description of its system up to the date of the service auditor’s assurance report that could have a significant effect on the service auditor’s assurance report.

39. The written representations shall be in the form of a representation letter addressed to the service auditor. The date of the written representations shall be as near as practicable to, but not after, the date of the service auditor’s assurance report.40. If, having discussed the matter with the service auditor, the service organisation does not provide one or more of the written representations requested in accordance with paragraph 39(a) and (b) of this SAE, the service auditor shall disclaim an opinion. (Ref: Para. A43)

Other Information41. The service auditor shall read the other information, if any, included in a document containing the service organisation’s description of its system and the service auditor’s assurance report, to identify material inconsistencies, if any, with that description. While reading the other information for the purpose of identifying material inconsistencies, the service auditor may become aware of an apparent misstatement of fact in that other information.42. If the service auditor becomes aware of a material inconsistency or an apparent misstatement of fact in the other information, the service auditor shall discuss the matter with the service organisation. If the service auditor concludes that there is a material inconsistency or a misstatement of fact in the other information that the service organisation refuses to correct, the service auditor shall take further appropriate action. (Ref: Para. A45)

Subsequent Events43. The service auditor shall inquire whether the service organisation is aware of any events subsequent to the period covered

10 This SAE does not deal with instances when individual internal auditors provide direct assistance to the service auditor in carrying out audit procedures.

11 Paragraph 13(b)(v) of this SAE.

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by the service organisation’s description of its system up to the date of the service auditor’s assurance report that could have a significant effect on the service auditor’s assurance report. If the service auditor is aware of such an event, and information about that event is not disclosed by the service organisation, the service auditor shall disclose it in the service auditor’s assurance report.44. The service auditor has no obligation to perform any procedures regarding the description of the service organisation’s system, or the suitability of design or operating effectiveness of controls, after the date of the service auditor’s assurance report.

Documentation45. The service auditor shall prepare documentation that is sufficient to enable an experienced service auditor, having no previous connection with the engagement, to understand:(a) The nature, timing, and extent of the

procedures performed to comply with this SAE and applicable legal and regulatory requirements;

(b) The results of the procedures performed, and the evidence obtained; and

(c) Significant matters arising during the engagement, and the conclusions reached thereon and significant professional judgments made in reaching those conclusions.

46. In documenting the nature, timing and extent of procedures performed, the service auditor shall record:(a) The identifying characteristics of the

specific items or matters being tested;(b) Who performed the work and the date

such work was completed; and(c) Who reviewed the work performed and

the date and extent of such review.47. If the service auditor uses specific work of the internal auditors, the service auditor shall document the conclusions reached regarding the evaluation of the adequacy of the work of the internal auditors, and the procedures performed by the service auditor on that work.48. The service auditor shall document discussions of significant matters with the service organisation and others including the nature of the significant matters discussed and when and with whom the discussions took place.49. If the service auditor has identified information that is inconsistent with the service auditor’s final conclusion regarding a significant matter, the service auditor shall document how the service auditor addressed the inconsistency.50. The service auditor shall assemble the

documentation in an engagement file and complete the administrative process of assembling the final engagement file on a timely basis after the date of the service auditor’s assurance report12.51. After the assembly of the final engagement file has been completed, the service auditor shall not delete or discard documentation before the end of its retention period. (Ref: Para. A46)52. If the service auditor finds it necessary to modify existing engagement documen-tation or add new documentation after the assembly of the final engagement file has been completed and that documentation does not affect the service auditor’s report, the service auditor shall, regardless of the nature of the modifications or additions, document:(a) The specific reasons for making them;

and(b) When and by whom they were made

and reviewed.

Preparing the Service Auditor’s Assurance ReportContent of the Service Auditor’s Assurance Report53. The service auditor’s assurance report shall include the following basic elements: (Ref: Para. A47)(a) A title that clearly indicates the report

is an independent service auditor’s assurance report.

(b) An addressee.(c) Identification of:

(i) The service organisation’s description of its system, and the service organisation’s assertion, which includes the matters described in paragraph 9(k)(ii) for a Type 2 Report, or paragraph 9(j)(ii) for a Type 1 Report.

(ii) Those parts of the service organisation’s description of its system, if any, that are not covered by the service auditor’s opinion.

(iii) If the description refers to the need for complementary user entity controls, a statement that the service auditor has not evaluated the suitability of design or operating effectiveness of complementary user entity controls, and that the control objectives stated in the service organisation’s description of its system can be achieved only if complementary user entity controls are suitably designed or operating effectively, along with the controls at the service organisation.

(iv) If services are performed by a subservice organisation, the nature of activities performed

by the subservice organisation as described in the service organisation’s description of its system and whether the inclusive method or the carve-out method has been used in relation to them. Where the carve-out method has been used, a statement that the service organisation’s description of its system excludes the control objectives and related controls at relevant subservice organisations, and that the service auditor’s procedures do not extend to controls at the subservice organisation. Where the inclusive method has been used, a statement that the service organisation’s description of its system includes control objectives and related controls at the subservice organisation, and that the service auditor’s procedures extended to controls at the subservice organisation.

(d) Identification of the criteria, and the party specifying the control objectives.

(e) A statement that the report and, in the case of a Type 2 Report, the description of tests of controls are intended only for user entities and their auditors, who have a sufficient understanding to consider it, along with other information including information about controls operated by user entities themselves, when assessing the risks of material misstatements of user entities’ financial statements. (Ref: Para. A48)

(f) A statement that the service organisation is responsible for:(i) Preparing the description of its

system, and the accompanying assertion, including the completeness, accuracy and method of presentation of that description and that assertion;

(ii) Providing the services covered by the service organisation’s description of its system;

(iii) Stating the control objectives (where not identified by law or regulation, or another party, for example, a user group or a professional body); and

(iv) Designing and implementing controls to achieve the control objectives stated in the service organisation’s description of its system.

(g) A statement that the service auditor’s responsibility is to express an opinion on the service organisation’s description, on the design of controls related to the control objectives stated in that description and, in the case of a Type 2

12 Standard on Quality Control (SQC) 1, paragraphs 74-76, provide further guidance.

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Report, on the operating effectiveness of those controls, based on the service auditor’s procedures.

(h) A statement that the engagement was performed in accordance with SAE 3402, “Assurance Reports on Controls at a Service Organisation,” which requires that the service auditor comply with ethical requirements and plan and perform procedures to obtain reasonable assurance about whether, in all material respects, the service organisation’s description of its system is fairly presented and the controls are suitably designed and, in the case of a Type 2 Report, are operating effectively.

(i) A summary of the service auditor’s procedures to obtain reasonable assurance and a statement of the service auditor’s belief that the evidence obtained is sufficient and appropriate to provide a basis for the service auditor’s opinion, and, in the case of a Type 1 Report, a statement that the service auditor has not performed any procedures regarding the operating effectiveness of controls and therefore no opinion is expressed thereon.

(j) A statement of the limitations of controls and, in the case of a Type 2 Report, of the risk of projecting to future periods any evaluation of the operating effectiveness of controls.

(k) The service auditor’s opinion, expressed in the positive form, on whether, in all material respects, based on suitable criteria: (i) In the case of a Type 2 Report:

a. The description fairly presents the service organisation’s system that had been designed and implemented throughout the specified period;

b. The controls related to the control objectives stated in the service organisation’s description of its system were suitably designed throughout the specified period; and

c. The controls tested, which were those necessary to provide reasonable assurance that the control objectives stated in the description were achieved, operated effectively throughout the specified period.

(ii) In the case of a Type 1 Report:a. The description fairly presents

the service organisation’s system that had been designed and implemented as at the specified date; and

b. The controls related to the control objectives stated in the service organisation’s

description of its system were suitably designed as at the specified date.

(l) The date of the service auditor’s assurance report, which shall be no earlier than the date on which the service auditor has obtained sufficient appropriate evidence on which to base the opinion.

(m) Practitioner’s Signature - The report should be signed by the practitioner in his personal name. Where the firm is appointed, the report should be signed in the personal name of the engagement partner and in the name of the firm. The partner/proprietor signing the assurance report also needs to mention the membership number assigned by the Institute of Chartered Accountants of India (the Institute). If Partnership/proprietorship firm is appointed, the registration number of the firm, as may be allotted by the Institute, also needs to be mentioned in the assurance reports signed by them.

(n) The place of signature – the report should name specific location, which is ordinarily the city where the report is signed..

54. In the case of a Type 2 Report, the service auditor’s assurance report shall include a separate section after the opinion, or an attachment, that describes the tests of controls that were performed and the results of those tests. In describing the tests of controls, the service auditor shall clearly state which controls were tested, identify whether the items tested represent all or a selection of the items in the population, and indicate the nature of the tests in sufficient detail to enable user auditors to determine the effect of such tests on their risk assessments. If deviations have been identified, the service auditor shall include the extent of testing performed that led to identification of the deviations (including the sample size where sampling has been used), and the number and nature of the deviations noted. The service auditor shall report deviations even if, on the basis of tests performed, the service auditor has concluded that the related control objective was achieved. (Ref: Para. A18 and A49)Modified Opinions55. If the service auditor concludes that: (Ref: Para. A50-A52)(a) The service organisation’s description

does not fairly present, in all material respects, the system as designed and implemented;

(b) The controls related to the control objectives stated in the description were not suitably designed, in all material respects;

(c) In the case of a Type 2 Report, the

controls tested, which were those necessary to provide reasonable assurance that the control objectives stated in the service organisation’s description of its system were achieved, did not operate effectively, in all material respects; or

(d) The service auditor is unable to obtain sufficient appropriate evidence, the service auditor’s opinion shall be modified, and the service auditor’s assurance report shall contain a clear description of all the reasons for the modification.

Other Communication Responsibilities56. If the service auditor becomes aware of non-compliance with laws and regulations, fraud, or uncorrected errors attributable to the service organisation that are not clearly trivial and may affect one or more user entities, the service auditor shall determine whether the matter has been communicated appropriately to affected user entities. If the matter has not been so communicated and the service organisation is unwilling to do so, the service auditor shall take appropriate action. (Ref: Para. A53)

***

Application and Other Explanatory MaterialScope of this SAE (Ref: Para. 1 and 3)A1. Internal control is a process designed to provide reasonable assurance regarding the achievement of objectives related to the reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations. Controls related to a service organisation’s operations and compliance objectives may be relevant to a user entity’s internal control as it relates to financial reporting. Such controls may pertain to assertions about presentation and disclosure relating to account balances, classes of transactions or disclosures, or may pertain to evidence that the user auditor evaluates or uses in applying auditing procedures. For example, a payroll processing service organisation’s controls related to the timely remittance of payroll deductions to government authorities may be relevant to a user entity as late remittances could incur interest and penalties that would result in a liability for the user entity. Similarly, a service organisation’s controls over the acceptability of investment transactions from a regulatory perspective may be considered relevant to a user entity’s presentation and disclosure of transactions and account balances in its financial statements. The determination of whether controls at a service organisation related to operations and compliance are likely

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to be relevant to user entities’ internal control as it relates to financial reporting is a matter of professional judgment, having regard to the control objectives set by the service organisation and the suitability of the criteria.A2. The service organisation may not be able to assert that the system is suitably designed when, for example, the service organisation is operating a system that has been designed by a user entity or is stipulated in a contract between a user entity and the service organisation. Because of the inextricable link between the suitable design of controls and their operating effectiveness, the absence of an assertion with respect to the suitability of design will likely preclude the service auditor from concluding that the controls provide reasonable assurance that the control objectives have been met and thus from opining on the operating effectiveness of controls. As an alternative, the practitioner may choose to accept an agreed-upon procedures engagement to perform tests of controls, or an assurance engagement under proposed SAE 3000 to conclude on whether, based on tests of controls, the controls have operated as described.

Definitions (Ref: Para. 9(d) and 9(g))A3. The definition of “controls at the service organisation” includes aspects of user entities’ information systems maintained by the service organisation, and may also include aspects of one or more of the other components of internal control at a service organisation. For example, it may include aspects of a service organisation’s control environment, monitoring, and control activities when they relate to the services provided. It does not, however, include controls at a service organisation that are not related to the achievement of the control objectives stated in the service organisation’s description of its system, for example, controls related to the preparation of the service organisation’s own financial statements.A4. When the inclusive method is used, the requirements in this SAE also apply to the services provided by the subservice organisation, including obtaining agreement regarding the matters in paragraph 13(b)(i)-(v) as applied to the subservice organisation rather than the service organisation. Performing procedures at the subservice organisation entails coordination and communication between the service organisation, the subservice organisation, and the service auditor. The inclusive method generally is feasible only if the service organisation and the subservice organisation are related, or if the contract between the service organisation and the subservice organisation provides for its use.

Ethical Requirements (Ref: Para. 11)A5. The service auditor is subject to relevant independence requirements, which ordinarily comprise Code of Ethics of the Institute in performing an engagement in accordance with this SAE, the Code of Ethics of the ICAI does not require the service auditor to be independent from each user entity.

Management and Those Charged with Governance (Ref: Para. 12)A6. Management and governance structures vary by jurisdiction and by entity, reflecting influences such as different cultural and legal backgrounds, and size and ownership characteristics. Such diversity means that it is not possible for this SAE to specify for all engagements the person(s) with whom the service auditor is to interact regarding particular matters. For example, the service organisation may be a segment of a third-party organisation and not a separate legal entity. In such cases, identifying the appropriate management personnel or those charged with governance from whom to request written representations may require the exercise of professional judgment.

Acceptance and ContinuanceCapabilities and Competence to Perform the Engagement (Ref: Para. 13(a)(i))A7. Relevant capabilities and competence to perform the engagement include matters such as the following:• Knowledge of the relevant industry;• An understanding of information

technology and systems;• Experience in evaluating risks as they

relate to the suitable design of controls; and

• Experience in the design and execution of tests of controls and the evaluation of the results.

Service Organisation’s Assertion (Ref: Para. 13(b)(i))A8. Refusal, by a service organisation, to provide a written assertion, subsequent to an agreement by the service auditor to accept, or continue, an engagement, represents a scope limitation that causes the service auditor to withdraw from the engagement. If law or regulation does not allow the service auditor to withdraw from the engagement, the service auditor disclaims an opinion.Reasonable Basis for Service Organisation’s Assertion (Ref: Para. 13(b)(ii))A9. In the case of a Type 2 Report, the service organisation’s assertion includes a statement that the controls related to the control objectives stated in the service organisation’s description of its system operated effectively throughout the specified period. This assertion may be based

on the service organisation’s monitoring activities. Monitoring of controls is a process to assess the effectiveness of controls over time. It involves assessing the effectiveness of controls on a timely basis, identifying and reporting deficiencies to appropriate individuals within the service organisation, and taking necessary corrective actions. The service organisation accomplishes monitoring of controls through ongoing activities, separate evaluations, or a combination of both. The greater the degree and effectiveness of ongoing monitoring activities, the less need for separate evaluations. Ongoing monitoring activities are often built into the normal recurring activities of a service organisation and include regular management and supervisory activities. Internal auditors or personnel performing similar functions may contribute to the monitoring of a service organisation’s activities. Monitoring activities may also include using information communicated by external parties, such as customer complaints and regulator comments, which may indicate problems or highlight areas in need of improvement. The fact that the service auditor will report on the operating effectiveness of controls is not a substitute for the service organisation’s own processes to provide a reasonable basis for its assertion.Identification of Risks (Ref: Para. 13(b)(iv))A10. As noted in paragraph 9(c), control objectives relate to risks that controls seek to mitigate. For example, the risk that a transaction is recorded at the wrong amount or in the wrong period can be expressed as a control objective that transactions are recorded at the correct amount and in the correct period. The service organisation is responsible for identifying the risks that threaten achievement of the control objectives stated in the description of its system. The service organisation may have a formal or informal process for identifying relevant risks. A formal process may include estimating the significance of identified risks, assessing the likelihood of their occurrence, and deciding about actions to address them. However, since control objectives relate to risks that controls seek to mitigate, thoughtful identification of control objectives when designing and implementing the service organisation’s system may itself comprise an informal process for identifying relevant risks.Acceptance of a Change in the Terms of the Engagement (Ref: Para. 14)A11. A request to change the scope of the engagement may not have a reasonable justification when, for example, the request is made to exclude certain control objectives from the scope of the engagement because of the likelihood that the service auditor’s opinion would be modified; or the service

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organisation will not provide the service auditor with a written assertion and the request is made to perform the engagement under proposed SAE 3000.A12. A request to change the scope of the engagement may have a reasonable justification when, for example, the request is made to exclude from the engagement a subservice organisation when the service organisation cannot arrange for access by the service auditor, and the method used

for dealing with the services provided by that subservice organisation is changed from the inclusive method to the carve-out method.Assessing the Suitability of the Criteria (Ref: Para. 15-18)A13. Criteria need to be available to the intended users to allow them to understand the basis for the service organisation’s assertion about the fair presentation of its description of the system, the suitability of

the design of controls and, in the case of a Type 2 Report, the operating effectiveness of the controls related to the control objectives.A14. Proposed SAE 3000 requires the service auditor, among other things, to assess the suitability of criteria, and the appropriateness of the subject matter13. The subject matter is the underlying condition of interest to intended users of an assurance report. The following table

13 Proposed SAE 3000, paragraphs 18-19.14 The “subject matter information” is the outcome of the evaluation or measurement of the subject matter that results from applying the criteria to the

subject matter.

Subject matter Criteria Comment

Opinion about the fair presentation of the description of the service organization’s system (type 1 and Type 2 Reports)

The service organization’s system that is likely to be relevant to user entities’ internal control as it relates to financial reporting and is covered by the service auditor’s assurance report.

The description is fairly presented if it: (a) presents how the service organization’s system was designed and implemented including, as appropriate, the matters identified in paragraph 16(a)(i)-(viii); (b) in the case of a Type 2 Report, includes relevant details of changes to the service organization’s system during the period covered by the description; and (c) does not omit or distort information relevant to the scope of the service organization’s system being described, while acknowledging that the description is prepared to meet the common needs of a broad range of user entities and may not, therefore, include every aspect of the service organization’s system that each individual user entity may consider important in its own particular environment.

The specific wording of the criteria for this opinion may need to be tailored to be consistent with criteria established by, for example, law or regulation, user groups, or a professional body. Examples of criteria for this opinion are provided in the illustrative service organization’s assertion in Appendix 1. Paragraphs A21-A24 offer further guidance on determining whether these criteria are met. (In terms of the requirements of proposed SAE 3000, the subject matter information14 for this opinion is the service organization’s description of its system and the service organization’s assertion that the description is fairly presented.)

Opinion about suitability of design, and operating effectiveness (Type 2 Reports)

The suitability of the design and operating effectiveness of those controls that are necessary to achieve the control objectives stated in the service organization’s description of its system.

The controls are suitably designed and operating effectively if: (a) the service organization has identified the risks that threaten achievement of the control objectives stated in the description of its system; (b) the controls identified in that description would, if operated as described, provide reasonable assurance that those risks do not prevent the stated control objectives from being achieved; and (c) the controls were consistently applied as designed throughout the specified period. This includes whether manual controls were applied by individuals who have the appropriate competence and authority.

When the criteria for this opinion are met, controls will have provided reasonable assurance that the related control objectives were achieved throughout the specified period. (In terms of the requirements of proposed SAE 3000, the subject matter information for this opinion is the service organization’s assertion that controls are suitably designed and that they are operating effectively.)

The control objectives, which are stated in the service organization’s description of its system, are part of the criteria for these opinions. The stated control objectives will differ from engagement to engagement. If, as part of forming the opinion on the description, the service auditor concludes the stated control objectives are not fairly presented then those control objectives would not be suitable as part of the criteria for forming an opinion on either the design or operating effectiveness of controls.

Opinion about suitability of design (Type 1 Reports)

The suitability of the design of those controls that are necessary to achieve the control objectives stated in the service organization’s description of its system.

The controls are suitably designed if: (a) the service organization has identified the risks that threaten achievement of the control objectives stated in the description of its system; and (b) the controls identified in that description would, if operated as described, provide reasonable assurance that those risks do not prevent the stated control objectives from being achieved.

Meeting these criteria does not, of itself, provide any assurance that the related control objectives were achieved because no assurance has been obtained about the operation of controls. (In terms of the requirements of proposed SAE 3000, the subject matter information for this opinion is the service organization’s assertion that controls are suitably designed.)

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identifies the subject matter and minimum criteria for each of the opinions in Type 2 and Type 1 Reports.A15. Paragraph 16(a) identifies a number of elements that are included in the service organisation’s description of its system as appropriate. These elements may not be appropriate if the system being described is not a system that processes transactions, for example, if the system relates to general controls over the hosting of an IT application but not the controls embedded in the application itself.

Materiality (Ref: Para. 19 and 54)A16. In an engagement to report on controls at a service organisation, the concept of materiality relates to the system being reported on, not the financial statements of user entities. The service auditor plans and performs procedures to determine whether the service organisation’s description of its system is fairly presented in all material respects, whether controls at the service organisation are suitably designed in all material respects and, in the case of a Type 2 Report, whether controls at the service organisation are operating effectively in all material respects. The concept of materiality takes into account that the service auditor’s assurance report provides information about the service organisation’s system to meet the common information needs of a broad range of user entities and their auditors who have an understanding of the manner in which that system has been used.A17. Materiality with respect to the fair presentation of the service organisation’s description of its system, and with respect to the design of controls, includes primarily the consideration of qualitative factors, for example: whether the description includes the significant aspects of processing significant transactions; whether the description omits or distorts relevant information; and the ability of controls, as designed, to provide reasonable assurance that control objectives would be achieved. Materiality with respect to the service auditor’s opinion on the operating effectiveness of controls includes the consideration of both quantitative and qualitative factors, for example, the tolerable rate and observed rate of deviation (a quantitative matter), and the nature and cause of any observed deviation (a qualitative matter).A18. The concept of materiality is not applied when disclosing, in the description of the tests of controls, the results of those tests where deviations have been identified. This is because, in the particular circumstances of a specific user entity or user auditor, the deviation may have significance beyond

whether or not, in the opinion of the service auditor, it prevents a control from operating effectively. For example, the control to which the deviation relates may be particularly significant in preventing a certain type of error that may be material in the particular circumstances of a user entity’s financial statements.

Obtaining an Understanding of the Service Organisation’s System (Ref: Para. 20)A19. Obtaining an understanding of the service organisation’s system, including controls, included in the scope of the engagement, assists the service auditor in:• Identifying the boundaries of that

system, and how it interfaces with other systems.

• Assessing whether the service organisation’s description fairly presents the system that has been designed and implemented.

• Determining which controls are necessary to achieve the control objectives stated in the service organisation’s description of its system.

• Assessing whether controls were suitably designed.

• Assessing, in the case of a Type 2 Report, whether controls were operating effectively.

A20. The service auditor’s procedures to obtain this understanding may include:• Inquiring of those within the service

organisation who, in the service auditor’s judgment, may have relevant information.

• Observing operations and inspecting documents, reports, printed and electronic records of transaction processing.

• Inspecting a selection of agreements between the service organisation and user entities to identify their common terms.

• Reperforming control procedures.

Obtaining Evidence Regarding the Description (Ref: Para. 21-22)A21. Considering the following questions may assist the service auditor in determining whether those aspects of the description included in the scope of the engagement are fairly presented in all material respects:• Does the description address the major

aspects of the service provided (within the scope of the engagement) that could reasonably be expected to be relevant to the common needs of a broad range of user auditors in planning their audits of user entities’ financial statements?

• Is the description prepared at a level of detail that could reasonably be

expected to provide a broad range of user auditors with sufficient information to obtain an understanding of internal control in accordance with SA 315?15 The description need not address every aspect of the service organisation’s processing or the services provided to user entities, and need not be so detailed as to potentially allow a reader to compromise security or other controls at the service organisation.

• Is the description prepared in a manner that does not omit or distort information that may affect the common needs of a broad range of user auditors’ decisions, for example, does the description contain any significant omissions or inaccuracies in processing of which the service auditor is aware?

• Where some of the control objectives stated in the service organisation’s description of its system have been excluded from the scope of the engagement, does the description clearly identify the excluded objectives?

• Have the controls identified in the description been implemented?

• Are complementary user entity controls, if any, described adequately? In most cases, the description of control objectives is worded such that the control objectives are capable of being achieved through effective operation of controls implemented by the service organisation alone. In some cases, however, the control objectives stated in the service organisation’s description of its system cannot be achieved by the service organisation alone because their achievement requires particular controls to be implemented by user entities. This may be the case where, for example, the control objectives are specified by a regulatory authority. When the description does include complementary user entity controls, the description separately identifies those controls along with the specific control objectives that cannot be achieved by the service organisation alone.

• If the inclusive method has been used, does the description separately identify controls at the service organisation and controls at the subservice organisation? If the carve-out method is used, does the description identify the functions that are performed by the subservice organisation? When the carve-out method is used, the description need not describe the detailed processing or controls at the subservice organisation.

A22. The service auditor’s procedures to evaluate the fair presentation of the

15 SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment.”

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description may include:• Considering the nature of user entities

and how the services provided by the service organisation are likely to affect them, for example, whether user entities are from a particular industry and whether they are regulated by government agencies.

• Reading standard contracts, or standard terms of contracts, (if applicable) with user entities to gain an understanding of the service organisation’s contractual obligations.

• Observing procedures performed by service organisation personnel.

• Reviewing the service organisation’s policy and procedure manuals and other systems documentation, for example, flowcharts and narratives.

A23. Paragraph 22(a) requires the service auditor to evaluate whether the control objectives stated in the service organisation’s description of its system are reasonable in the circumstances.Considering the following questions may assist the service auditor in this evaluation:• Have the stated control objectives

been designated by the service organisation or by outside parties such as a regulatory authority, a user group, or a professional body that follows a transparent due process?

• Where the stated control objectives have been specified by the service organisation, do they relate to the types of assertions commonly embodied in the broad range of user entities’ financial statements to which controls at the service organisation could reasonably be expected to relate? Although the service auditor ordinarily will not be able to determine how controls at a service organisation specifically relate to the assertions embodied in individual user entities’ financial statements, the service auditor’s understanding of the nature of the service organisation’s system, including controls, and services being provided is used to identify the types of assertions to which those controls are likely to relate.

• Where the stated control objectives have been specified by the service organisation, are they complete? A complete set of control objectives can provide a broad range of user auditors with a framework to assess the effect of controls at the service organisation on the assertions commonly embodied in user entities’ financial statements.

A24. The service auditor’s procedures to determine whether the service organisation’s system has been implemented may be similar to, and performed in conjunction with, procedures

to obtain an understanding of that system. They may also include tracing items through the service organisation’s system and, in the case of a Type 2 Report, specific inquiries about changes in controls that were implemented during the period. Changes that are significant to user entities or their auditors are included in the description of the service organisation’s system.

Obtaining Evidence Regarding Design of Controls (Ref: Para. 23 and 28(b))A25. From the viewpoint of a user entity or a user auditor, a control is suitably designed if, individually or in combination with other controls, it would, when complied with satisfactorily, provide reasonable assurance that material misstatements are prevented, or detected and corrected. A service organisation or a service auditor, however, is not aware of the circumstances at individual user entities that would determine whether or not a misstatement resulting from a control deviation is material to those user entities. Therefore, from the viewpoint of a service auditor, a control is suitably designed if, individually or in combination with other controls, it would, when complied with satisfactorily, provide reasonable assurance that control objectives stated in the service organisation’s description of its system are achieved.A26. A service auditor may consider using flowcharts, questionnaires, or decision tables to facilitate understanding the design of the controls.A27. Controls may consist of a number of activities directed at the achievement of a control objective. Consequently, if the service auditor evaluates certain activities as being ineffective in achieving a particular control objective, the existence of other activities may allow the service auditor to conclude that controls related to the control objective are suitably designed.

Obtaining Evidence Regarding Operating Effectiveness of ControlsAssessing Operating Effectiveness (Ref: Para. 24)A28. From the viewpoint of a user entity or a user auditor, a control is operating effectively if, individually or in combination with other controls, it provides reasonable assurance that material misstatements, whether due to fraud or error, are prevented, or detected and corrected. A service organisation or a service auditor, however, is not aware of the circumstances at individual user entities that would determine whether a misstatement resulting from a control deviation had occurred and, if so, whether it is material. Therefore, from the viewpoint of a service auditor, a control is operating effectively if, individually or in combination

with other controls, it provides reasonable assurance that control objectives stated in the service organisation’s description of its system are achieved. Similarly, a service organisation or a service auditor is not in a position to determine whether any observed control deviation would result in a material misstatement from the viewpoint of an individual user entity.A29. Obtaining an understanding of controls sufficient to opine on the suitability of their design is not sufficient evidence regarding their operating effectiveness, unless there is some automation that provides for the consistent operation of the controls as they were designed and implemented. For example, obtaining information about the implementation of a manual control at a point in time does not provide evidence about operation of the control at other times. However, because of the inherent consistency of IT processing, performing procedures to determine the design of an automated control, and whether it has been implemented, may serve as evidence of that control’s operating effectiveness, depending on the service auditor’s assessment and testing of other controls, such as those over program changes.A30. To be useful to user auditors, a Type 2 Report ordinarily covers a minimum period of six months. If the period is less than six months, the service auditor may consider it appropriate to describe the reasons for the shorter period in the service auditor’s assurance report. Circumstances that may result in a report covering a period of less than six months include when (a) the service auditor is engaged close to the date by which the report on controls is to be issued; (b) the service organisation (or a particular system or application) has been in operation for less than six months; or (c) significant changes have been made to the controls and it is not practicable either to wait six months before issuing a report or to issue a report covering the system both before and after the changes.A31. Certain control procedures may not leave evidence of their operation that can be tested at a later date and, accordingly, the service auditor may find it necessary to test the operating effectiveness of such control procedures at various times throughout the reporting period. A32. The service auditor provides an opinion on the operating effectiveness of controls throughout each period, therefore, sufficient appropriate evidence about the operation of controls during the current period is required for the service auditor to express that opinion. Knowledge of deviations observed in prior engagements may, however, lead the service auditor to increase the extent of testing during the current period.

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Testing of Indirect Controls (Ref: Para. 25(b))A33. In some circumstances, it may be necessary to obtain evidence supporting the effective operation of indirect controls. For example, when the service auditor decides to test the effectiveness of a review of exception reports detailing sales in excess of authorized credit limits, the review and related follow up is the control that is directly of relevance to the service auditor. Controls over the accuracy of the information in the reports (for example, the general IT controls) are described as “indirect” controls.A34. Because of the inherent consistency of IT processing, evidence about the implementation of an automated appli-cation control, when considered in combination with evidence about the operating effectiveness of the service organisation’s general controls (in particular, change controls), may also provide substantial evidence about its operating effectiveness.Means of Selecting Items for Testing (Ref: Para. 25(c) and 27)A35. The means of selecting items for testing available to the service auditor are:(a) Selecting all items (100% examination).

This may be appropriate for testing controls that are applied infrequently, for example, quarterly, or when evidence regarding application of the control makes 100% examination efficient;

(b) Selecting specific items. This may be appropriate where 100% examination would not be efficient and sampling would not be effective, such as testing controls that are not applied sufficiently frequently to render a large population for sampling, for example, controls that are applied monthly or weekly; and

(c) Sampling. This may be appropriate for testing controls that are applied frequently in a uniform manner and which leave documentary evidence of their application.

A36. While selective examination of specific items will often be an efficient means of obtaining evidence, it does not constitute sampling. The results of procedures applied to items selected in this way cannot be projected to the entire population; accordingly, selective examination of specific items does not provide evidence concerning the remainder of the population. Sampling, on the other hand, is designed to enable conclusions to be drawn about an entire population on the basis of testing a sample drawn from it.

The Work of an Internal Audit FunctionObtaining an Understanding of the Internal Audit Function (Ref: Para. 30)A37. An internal audit function may be responsible for providing analyses, evaluations, assurances, recommendations, and other information to management and those charged with governance. An internal audit function at a service organisation may perform activities related to the service organisation’s own system of internal control, or activities related to the services and systems, including controls, that the service organisation is providing to user entities.Determining Whether and to What Extent to Use the Work of the Internal Auditors (Ref: Para. 33)A38. In determining the planned effect of the work of the internal auditors on the nature, timing or extent of the service auditor’s procedures, the following factors may suggest the need for different or less extensive procedures than would otherwise be the case:• The nature and scope of specific work

performed, or to be performed, by the internal auditors is quite limited.

• The work of the internal auditors relates to controls that are less significant to the service auditor’s conclusions.

• The work performed, or to be performed, by the internal auditors does not require subjective or complex judgments.

Using the Work of the Internal Audit Function (Ref: Para. 34)A39. The nature, timing and extent of the service auditor’s procedures on specific work of the internal auditors will depend on the service auditor’s assessment of the significance of that work to the service auditor’s conclusions (for example, the significance of the risks that the controls tested seek to mitigate), the evaluation of the internal audit function and the evaluation of the specific work of the internal auditors. Such procedures may include:• Examination of items already examined

by the internal auditors;• Examination of other similar items; and• Observation of procedures performed

by the internal auditors.Effect on the Service Auditor’s Assurance Report (Ref: Para. 36-37)A40. Irrespective of the degree of autonomy and objectivity of the internal audit function, such function is not independent of the service organisation as is required of the service auditor when performing the engagement. The service auditor has sole responsibility for the opinion expressed in the service auditor’s assurance report, and

that responsibility is not reduced by the service auditor’s use of the work of the internal auditors.A41. The service auditor’s description of work performed by the internal audit function may be presented in a number of ways, for example:• By including introductory material to

the description of tests of controls indicating that certain work of the internal audit function was used in performing tests of controls.

• Attribution of individual tests to internal audit.

Written Representations (Ref: Para. 38 and 40)A42. The written representations required by paragraph 39 are separate from, and in addition to, the service organisation’s assertion, as defined at paragraph 9(o).A43. If the service organisation does not provide the written representations requested in accordance with paragraph 39(c) of this SAE, it may be appropriate for the service auditor’s opinion to be modified in accordance with paragraph 56(d) of this SAE.

Other Information (Ref: Para. 42)A44. The Code of Ethics of the ICAI requires that a service auditor not be associated with information where the service auditor believes that the information:(a) Contains a materially false or misleading

statement;(b) Contains statements or information

furnished negligently; or(c) Omits or obscures information required

to be included where such omission or obscurity would be misleading16.

If other information included in a document containing the service organisation’s description of its system and the service auditor’s assurance report contains future-oriented information such as recovery or contingency plans, or plans for modifications to the system that will address deviations identified in the service auditor’s assurance report, or claims of a promotional nature that cannot be reasonably substantiated, the service auditor may request that information be removed or modified.A45. If the service organisation refuses to remove or modify the other information, further actions that may be appropriate include, for example:• Requesting the service organisation to

consult with its legal counsel as to the appropriate course of action.

• Describing the material inconsistency or material misstatement of fact in the assurance report.

• Withdrawing from the engagement.

16 Code of Ethics of the ICAI, paragraph 110.2.

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Documentation (Ref: Para. 51)A46. SQC 1 (or national requirements that are at least as demanding) requires firms to establish policies and procedures for the timely completion of the assembly of engagement files17. An appropriate time limit within which to complete the assembly of the final engagement file is ordinarily not more than 60 days after the date of the service auditor’s report18.

Preparing the Service Auditor’s Assurance ReportContent of the Service Auditor’s Assurance Report (Ref: Para. 53)A47. Illustrative examples of service auditors’ assurance reports and related service organisations’ assertions are contained in Appendices 1 and 2.Intended Users and Purposes of the Service Auditor’s Assurance Report (Ref: Para. 53(e))A48. The criteria used for engagements to report on controls at a service organisation are relevant only for the purposes of providing information about the service organisation’s system, including controls, to those who have an understanding of how the system has been used for financial reporting by user entities. Accordingly this is stated in the service auditor’s assurance report. In addition, the service auditor may consider it appropriate to include wording that specifically restricts distribution of the assurance report other than to intended users, its use by others, or its use for other purposes.Description of the Tests of Controls (Ref: Para. 54)A49. In describing the nature of the tests of controls for a Type 2 Report, it assists readers of the service auditor’s assurance report if the service auditor includes:• The results of all tests where deviations

have been identified, even if other controls have been identified that allow the service auditor to conclude that the relevant control objective has been achieved or the control tested has subsequently been removed from the service organisation’s description of its system.

• Information about causative factors for identified deviations, to the extent the service auditor has identified such factors.

Modified Opinions (Ref: Para. 55)A50. Illustrative examples of elements of modified service auditor’s assurance reports are contained in Appendix 3.A51. Even if the service auditor has expressed an adverse opinion or disclaimed an opinion, it may be appropriate to describe in the basis for modification paragraph the

reasons for any other matters of which the service auditor is aware that would have required a modification to the opinion, and the effects thereof.A52. When expressing a disclaimer of opinion because of a scope limitation, it is not ordinarily appropriate to identify the procedures that were performed nor include statements describing the characteristics of a service auditor’s engagement; to do so might overshadow the disclaimer of opinion.Other Communication Responsibilities (Ref: Para. 56)A53. Appropriate actions to respond to the circumstances identified in paragraph 57 may include:• Obtaining legal advice about the

consequences of different courses of action.

• Communicating with those charged with governance of the service organisation.

• Communicating with third parties (for example, a regulator) when required to do so.

• Modifying the service auditor’s opinion, or adding an Other Matter paragraph.

• Withdrawing from the engagement.

Appendix 1(Ref. Para. A47)

Example Service Organisation’s AssertionsThe following examples of service organisation’s assertions are for guidance only and are not intended to be exhaustive or applicable to all situations.Example 1: Type 2 Service Organisation’s AssertionAssertion by the Service Organisation

The accompanying description has been prepared for customers who have used [the type or name of] system and their auditors who have a sufficient understanding to consider the description, along with other information including information about controls operated by customers themselves, when assessing the risks of material misstatements of customers’ financial statements. [Entity’s name] confirms that:(a) The accompanying description at pages

[bb-cc] fairly presents [the type or name of] system for processing customers’ transactions throughout the period [date] to [date]. The criteria used in making this assertion were that the accompanying description:(i) Presents how the system was

designed and implemented, including:• The types of services provided,

including, as appropriate, classes of transactions processed.

• The procedures, within both information technology and manual systems, by which those transactions were initiated, recorded, processed, corrected as necessary, and transferred to the reports prepared for customers.

• The related accounting records, supporting information and specific accounts that were used to initiate, record, process and report transactions; this includes the correction of incorrect information and how information was transferred to the reports prepared for customers.

• How the system dealt with significant events and condi-tions, other than transactions.

• The process used to prepare reports for customers.

• Relevant control objectives and controls designed to achieve those objectives.

• Controls that we assumed, in the design of the system, would be implemented by user entities, and which, if necessary to achieve control objectives stated in the accompanying description, are identified in the description along with the specific control objectives that cannot be achieved by ourselves alone.

• Other aspects of our control environment, risk assessment process, information system (including the related business processes) and communication, control activities and monitoring controls that were relevant to processing and reporting customers’ transactions.

(ii) Includes relevant details of changes to the service organisation’s system during the period [date] to [date].

(iii) Does not omit or distort information relevant to the scope of the system being described, while acknowledging that the description is prepared to meet the common needs of a broad range of customers and their auditors and may not, therefore, include every aspect of the system that each individual customer may consider important in its own particular environment.

17 SQC 1, paragraph 74.18 SQC 1, paragraph 75.

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(b) The controls related to the control objectives stated in the accompanying description were suitably designed and operated effectively throughout the period [date] to [date]. The criteria used in making this assertion were that:(i) The risks that threatened

achievement of the control objectives stated in the description were identified;

(ii) The identified controls would, if operated as described, provide reasonable assurance that those risks did not prevent the stated control objectives from being achieved; and

(iii) The controls were consistently applied as designed, including that manual controls were applied by individuals who have the appropriate competence and authority, throughout the period [date] to [date].

Example 2: Type 1 Service Organisation’s AssertionThe accompanying description has been prepared for customers who have used [the type or name of] system and their auditors who have a sufficient understanding to consider the description, along with other information including information about controls operated by customers themselves, when obtaining an understanding of customers’ information systems relevant to financial reporting. [Entity’s name] confirms that:(a) The accompanying description at pages

[bb-cc] fairly presents [the type or name of] system for processing customers’ transactions as at [date]. The criteria used in making this assertion were that the accompanying description:(i) Presents how the system was

designed and implemented, including:• The types of services provided,

including, as appropriate, classes of transactions processed.

• The procedures, within both information technology and manual systems, by which those transactions were initiated, recorded, processed, corrected as necessary, and transferred to the reports prepared for customers.

• The related accounting records, supporting information and specific accounts that were used to initiate, record, process and report transactions; this includes the correction of incorrect information and how information is transferred to the reports prepared for customers.

• How the system dealt with significant events and condi-tions, other than transactions.

• The process used to prepare reports for customers.

• Relevant control objectives and controls designed to achieve those objectives.

• Controls that we assumed, in the design of the system, would be implemented by user entities, and which, if necessary to achieve control objectives stated in the accompanying description, are identified in the description along with the specific control objectives that cannot be achieved by ourselves alone.

• Other aspects of our control environment, risk assessment process, information system (including the related business processes) and communication, control activities and monitoring controls that were relevant to processing and reporting customers’ transactions.

(ii) Does not omit or distort information relevant to the scope of the system being described, while acknowledging that the description is prepared to meet the common needs of a broad range of customers and their auditors and may not, therefore, include every aspect of the system that each individual customer may consider important in its own particular environment.

(b) The controls related to the control objectives stated in the accompanying description were suitably designed as at [date]. The criteria used in making this assertion were that:(i) The risks that threatened

achievement of the control objectives stated in the description were identified; and

(ii) The identified controls would, if operated as described, provide reasonable assurance that those risks did not prevent the stated control objectives from being achieved.

Appendix 2

(Ref. Para. A47)Example Service Auditor’s Assurance ReportsThe following examples of reports are for guidance only and are not intended to be exhaustive or applicable to all situations.Example 1: Type 2 Service Auditor’s Assurance Report

Independent Service Auditor’s Assurance Report on the Description of Controls, their Design and Operating Effectiveness

To: XYZ Service Organisation

ScopeWe have been engaged to report on XYZ Service Organisation’s description at pages [bb-cc] of its [type or name of] system for processing customers’ transactions throughout the period [date] to [date] (the description), and on the design and operation of controls related to the control objectives stated in the description19.XYZ Service Organisation’s ResponsibilitiesXYZ Service Organisation is responsible for: preparing the description and accompanying assertion at page [aa], including the completeness, accuracy and method of presentation of the description and assertion; providing the services covered by the description; stating the control objectives; and designing, implementing and effectively operating controls to achieve the stated control objectives.Service Auditor’s ResponsibilitiesOur responsibility is to express an opinion on XYZ Service Organisation’s description and on the design and operation of controls related to the control objectives stated in that description, based on our procedures. We conducted our engagement in accordance with Standard on Assurance Engagements 3402, “Assurance Reports on Controls at a Service Organisation,” issued by the Auditing and Assurance Standards Board. That standard requires that we comply with ethical requirements and plan and perform our procedures to obtain reasonable assurance about whether, in all material respects, the description is fairly presented and the controls are suitably designed and operating effectively.An assurance engagement to report on the description, design and operating effectiveness of controls at a service organisation involves performing procedures to obtain evidence about the disclosures in the service organisation’s description of its system, and the design and operating effectiveness of controls. The procedures selected depend on the service auditor’s judgment, including the assessment of the risks that the description is not fairly presented, and that controls are not suitably designed or operating effectively. Our procedures included testing the operating effectiveness of those controls that we consider necessary to provide reasonable assurance that the control objectives stated in the description were achieved. An assurance engagement of this type also includes evaluating the overall presentation of the description, the suitability of the

19 If some elements of the description are not included in the scope of the engagement, this is made clear in the assurance report.

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objectives stated therein, and the suitability of the criteria specified by the service organisation and described at page [aa].We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.Limitations of Controls at a Service OrganisationXYZ Service Organisation’s description is prepared to meet the common needs of a broad range of customers and their auditors and may not, therefore, include every aspect of the system that each individual customer may consider important in its own particular environment. Also, because of their nature, controls at a service organisation may not prevent or detect all errors or omissions in processing or reporting transactions. Also, the projection of any evaluation of effectiveness to future periods is subject to the risk that controls at a service organisation may become inadequate or fail.OpinionOur opinion has been formed on the basis of the matters outlined in this report. The criteria we used in forming our opinion are those described at page [aa]. In our opinion, in all material respects:(a) The description fairly presents the [the

type or name of] system as designed and implemented throughout the period from [date] to [date];

(b) The controls related to the control objectives stated in the description were suitably designed throughout the period from [date] to [date]; and

(c) The controls tested, which were those necessary to provide reasonable assurance that the control objectives stated in the description were achieved, operated effectively throughout the period from [date] to [date].

Description of Tests of ControlsThe specific controls tested and the nature, timing and results of those tests are listed on pages [yy-zz].Intended Users and PurposeThis report and the description of tests of controls on pages [yy-zz] are intended only for customers who have used XYZ Service Organisation’s [type or name of] system, and their auditors, who have a sufficient understanding to consider it, along with other information including information about controls operated by customers themselves, when assessing the risks of material misstatements of customers’ financial statements.

For XYZ and Co.Chartered Accountants

Firm’s Registration Number

Signature(Name of the Member Signing the Audit

Report)(Designation20)

Membership Number

Place of SignatureDate

Example 2: Type 1 Service Auditor’s Assurance Report Independent Service Auditor’s Assurance Report on the Description of Controls and their Design

To: XYZ Service Organisation

ScopeWe have been engaged to report on XYZ Service Organisation’s description at pages [bb-cc] of its [type or name of] system for processing customers’ transactions as at [date] (the description), and on the design of controls related to the control objectives stated in the description21.We did not perform any procedures regarding the operating effectiveness of controls included in the description and, accordingly, do not express an opinion thereon.XYZ Service Organisation’s ResponsibilitiesXYZ Service Organisation is responsible for: preparing the description and accom-panying assertion at page [aa], including the completeness, accuracy and method of presentation of the description and the assertion; providing the services covered by the description; stating the control objectives; and designing, implementing and effectively operating controls to achieve the stated control objectives.Service Auditor’s ResponsibilitiesOur responsibility is to express an opinion on XYZ Service Organisation’s description and on the design of controls related to the control objectives stated in that description, based on our procedures. We conducted our engagement in accordance with Standard on Assurance Engagements 3402, “Assurance Reports on Controls at a Service Organisation,” issued by the Auditing and Assurance Standards Board. That standard requires that we comply with ethical requirements and plan and perform our procedures to obtain reasonable assurance about whether, in all material respects, the description is fairly presented and the controls are suitably designed in all material respects.An assurance engagement to report on the description and design of controls at a service organisation involves performing procedures to obtain evidence about the disclosures in the service organisation’s

description of its system, and the design of controls. The procedures selected depend on the service auditor’s judgment, including the assessment that the description is not fairly presented, and that controls are not suitably designed. An assurance engagement of this type also includes evaluating the overall presentation of the description, the suitability of the control objectives stated therein, and the suitability of the criteria specified by the service organisation and described at page [aa].As noted above, we did not perform any procedures regarding the operating effectiveness of controls included in the description and, accordingly, do not express an opinion thereon.We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.Limitations of Controls at a Service OrganisationXYZ Service Organisation’s description is prepared to meet the common needs of a broad range of customers and their auditors and may not, therefore, include every aspect of the system that each individual customer may consider important in its own particular environment. Also, because of their nature, controls at a service organisation may not prevent or detect all errors or omissions in processing or reporting transactions.OpinionOur opinion has been formed on the basis of the matters outlined in this report. The criteria we used in forming our opinion are those described at page [aa]. In our opinion, in all material respects:(a) The description fairly presents the [the

type or name of] system as designed and implemented as at [date]; and

(b) The controls related to the control objectives stated in the description were suitably designed as at [date].

Intended Users and PurposeThis report is intended only for customers who have used XYZ Service Organisation’s [type or name of] system, and their auditors, who have a sufficient understanding to consider it, along with other information including information about controls operated by customers themselves, when obtaining an understanding of customers’ information systems relevant to financial reporting.

For XYZ and Co.Chartered Accountants

Firm’s Registration Number

Signature(Name of the Member Signing the Audit

Report)(Designation22)

Membership Number

20 Partner or Proprietor, as the case may be.21 If some elements of the description are not included in the scope of the engagement, this is made clear in the assurance report.22 Partner or Proprietor, as the case may be.

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Place of SignatureDate

Appendix 3(Ref. Para. A50)

Example Modified Service Auditor’s Assurance ReportsThe following examples of modified reports are for guidance only and are not intended to be exhaustive or applicable to all situations. They are based on the examples of reports in Appendix 2.

Example 1: Qualified opinion – the service organisation’s description of the system is not fairly presented in all material respects…Service Auditor’s Responsibilities…We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.Basis for Qualified OpinionThe accompanying description states at page [mn] that XYZ Service Organisation uses operator identification numbers and passwords to prevent unauthorized access to the system. Based on our procedures, which included inquiries of staff personnel and observation of activities, we have determined that operator identification numbers and passwords are employed in Applications A and B but not in Applications C and D.Qualified OpinionOur opinion has been formed on the basis of the matters outlined in this report. The criteria we used in forming our opinion were those described in XYZ Service Organisation’s assertion at page [aa]. In our opinion, except for the matter described in the Basis for Qualified Opinion paragraph:(a) …

Example 2: Qualified opinion – the controls are not suitably designed to provide reasonable assurance that the control objectives stated in the service organisation’s description of its system will be achieved if the controls operate effectively…Service Auditor’s Responsibilities…We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.Basis for Qualified OpinionAs discussed at page [mn] of the accompanying description, from time to time XYZ Service Organisation makes changes in application programs to correct deficiencies or to enhance capabilities. The procedures followed in determining

whether to make changes, in designing the changes and in implementing them, do not include review and approval by authorized individuals who are independent from those involved in making the changes. There are also no specified requirements to test such changes or provide test results to an authorized reviewer prior to implementing the changes.Qualified OpinionOur opinion has been formed on the basis of the matters outlined in this report. The criteria we used in forming our opinion were those described in XYZ Service Organisation’s assertion at page [aa]. In our opinion, except for the matter described in the Basis for Qualified Opinion paragraph:(a) …

Example 3: Qualified opinion – the controls did not operate effectively throughout the specified period (Type 2 Report only)…Service Auditor’s Responsibilities…We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.Basis for Qualified OpinionXYZ Service Organisation states in its description that it has automated controls in place to reconcile loan payments received with the output generated. However, as noted at page [mn] of the description, this control was not operating effectively during the period from dd/mm/yyyy to dd/mm/yyyy due to a programming error. This resulted in the non-achievement of the control objective “Controls provide reasonable assurance that loan payments received are properly recorded” during the period from dd/mm/yyyy to dd/mm/yyyy. XYZ implemented a change to the program performing the calculation as of [date], and our tests indicate that it was operating effectively during the period from dd/mm/yyyy to dd/mm/yyyy.Qualified OpinionOur opinion has been formed on the basis of the matters outlined in this report. The criteria we used in forming our opinion were those described in XYZ Service Organisation’s assertion at page [aa]. In our opinion, except for the matter described in the Basis for Qualified Opinion paragraph:…

Example 4: Qualified opinion – the service auditor is unable to obtain sufficient appropriate evidence…Service Auditor’s Responsibilities…We believe that the evidence we have

obtained is sufficient and appropriate to provide a basis for our qualified opinion.Basis for Qualified OpinionXYZ Service Organisation states in its description that it has automated controls in place to reconcile loan payments received with the output generated. However, electronic records of the performance of this reconciliation for the period from dd/mm/yyyy to dd/mm/yyyy were deleted as a result of a computer processing error, and we were therefore unable to test the operation of this control for that period. Consequently, we were unable to determine whether the control objective “Controls provide reasonable assurance that loan payments received are properly recorded” operated effectively during the period from dd/mm/yyyy to dd/mm/yyyy.Qualified OpinionOur opinion has been formed on the basis of the matters outlined in this report. The criteria we used in forming our opinion were those described in XYZ Service Organisation’s assertion at page [aa]. In our opinion, except for the matter described in the Basis for Qualified Opinion paragraph:(a) … Limited Revisions consequential to issuance of the Standard on Assurance Engagement (SAE) 3402, “Assurance Reports on Controls At a Service Organisation”The amendments to the Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and Related Services have been shown in track change mode. Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and Related Services[No amendments are proposed to paragraphs 1-11.]Other Standards12a. Some Engagement Standards identified in paragraphs 5-7 contain: objectives, requirements, application and other explanatory material, introductory material and definitions. These terms are to be interpreted in a directly analogous way to how they are explained in the context of SAs and financial statement audits in SA 200 (Revised).12. Other Engagement Standards identified in paragraph 3 (b) to (d) as well as Standards on Quality Control referred to in paragraph 4 contain basic principles and essential procedures...[When the limited revisions are included in the Preface, paragraph 12a will become paragraph 12 and the Preface will be renumbered accordingly. No amendments are proposed to paragraphs 13-21.] n

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EVENTS


Organised by: Indirect Taxes Committee of ICAI Hosted by: NIRC, WIRC, SIRC, EIRC, Ahmedabad Branch of

WIRC and Bangalore Branch of SIRC respectively

CPE

Hours06 One Day Programme on Practice and Procedures before the CESTAT

atNew Delhi, Mumbai, Chennai, Kolkata, Ahmedabad and Bangalore

New Delhi 30.10.2010 (Saturday)Mumbai October, 2010Chennai 23.10.2010 (Saturday)

Kolkata 18.09.2010 (Saturday)Ahmedabad 23.10.2010 (Saturday)Bangalore 09.10.2010 (Saturday)

ObjectiveThe objective of the programme is to familiarise members with the procedures to be followed for filing

appeals, preparation and presentation of appeals before CESTAT.

Topics to be Discussed • Drafting of Appeal and Stay Petition before CESTAT• Representation before CESTAT including Written Submissions• Submission of Additional Evidence/Additional Grounds • CESTAT Rules• Mock CESTAT

For Registration and Further Details

New Delhi NIRC, ICAI : 011-3010 0507, 3010 0500, : [email protected], [email protected]

Mumbai WIRC, ICAI : 022-3980 2923, 3980 2922, : [email protected]

Chennai SIRC, ICAI : 044-3021 0321, : [email protected]

Kolkata EIRC, ICAI : 033-3021 1132, : [email protected]

Ahmedabad Ahmedabad Branch, ICAI : 079-3989 3989, 2768 0537, : [email protected]

Bangalore Bangalore Branch, ICAI : 080-3056 3513, : [email protected]

The complete announcement with details relating to dates, venues, time, fee etc. will be hosted on the website of ICAI and of the concerned Regional Councils/Branches hosting the programme.

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EVENTS


ICAI International Study Tour to Australia 7th-14th November 2010

524

World congress of Accounatnts-2010- Invitation for participation

World Congress Of Accountants is held under the sponsorship of the International Federation of Accountants (IFAC).

This is a well attended global forum attracting a meeting of influential communities to share in the latest information, innovative ideas and to exchange views on a platform of international and regional interest.

Coming to WCOA 2010 means: • Meeting themost influential and innovative minds

in business, finance, policy, standard setters anddecisionmakersfromallovertheglobe.

• Sharing and exchanging ideas on the latestbusinessandglobaleconomictrendsandreceivingupdatesonthelatestdevelopmentsininternationalaccountingandauditingstandards.

• Developing new knowledge and strengtheningcompetitivenessinissuesrelatedtogrowth.

• Gaining insights and first-hand information fromrenowned business leaders as well as networkingand socialising within a deluxe conference envir-onment presented in a state-of-the-art convention centre.

• Being in one of the most attractive and beautifulnations in theworld,Malaysia,hometo theworld’stallesttwintowersandthemeltingpotofAsiawherepeopleofdifferent faiths,beliefsandcultureshavecome to live harmoniously alongside one another,thusgivingthenationarichculturalheritage.

Developed Coun-tries *(USD)

Developing Countries

*(USD)

Normal(1 August -7 Nov 2010)

1,000 900

On-Site(8-11 Novem-ber 2010)

1,200 1,000

Accompanying Person 500 500

*AsdefinedbytheUnitedNations

For registration and for further details, you are requested to visit http://www.wcoa2010kualalumpur.com/

The Australia and India have enjoyed a special bonding in terms of their move to a regional economic operation and in terms of services sector in general and accountancy sector in particular. Both countries share common cultural and linguistic ties as both are part of the Commonwealth of Nations. The Institute of Chartered Accountants of India (ICAI) has recently signed Memorandum of Understanding (MOU) with CPA Australia and the Institute of Chartered Accountants of Australia (ICAA). These MoUs will provide an ample opportunity and recognition to Indian Chartered Accountants in Australia.In order to promotemember tomember and firm to firmcontactsoastounderstandtheeconomicandregulatoryenvironment and better understanding of the economicopportunities and to tap the vast market existing forCharteredAccountantsinAustralia;theInternationalAffairsCommitteeof ICAIwillbeundertakingthetourtoselectedcitiesofAustraliaduringNovember2010formembers,onself financing basis. The Study Tour is amix of business

meetings/networkingtowardscoupledwithexpositiontothelocalheritage.

The study tour would seek to hold discussionswith counterpart organizations, stakeholders,members etc. and will have the following basic objectives:-• Buildsustainablecapacitybyprovidingparticipants

anopportunitytoseeandinteractwithvariousofficialsinrespectivecountries

• Facilitateunderstandingandstepstowardsnetworkingof the accounting firms in India and respectivecountries

• Seek association for the research anddevelopmental activities of the Institute in different fields

• Discuss the issues of qualification and ways tofacilitatecooperationatfirmlevel

• Developanunderstandingtohelptradeandindustry

EVENTS


15

525

intherespectivecountriesandfacilitateinter-countrytradeandinvestment

Since,thedelegationsizewouldbelimitedto50,registrationforthestudytourwouldbeonfirst-come-first-servebasis.The detailed itinerary for the study tour is being finalizedand shall be intimated in due course to the confirmedparticipants. A tentative itinerary as it stands today andwhich is subject to change is also annexed hereto. Thiswouldincludethefollowing–• Economy Class Airfare with applicable taxes Ex-

NewDelhi.• Visacost• Allaccommodationon twinsharingbasis in4star

hotelsorsimilar• Allmeals(Indian):Breakfast,LunchandDinner.

• AlltransfersbyprivateA/Ccoach• SightseeingactivitiesincitiesofAustralia• Cost of all entrance tickets / fees for the above

mentionedsightseeingtours.• Servicesoflocaltourguide.• AllcurrentapplicableHotel&GovernmentTaxes

FurtherdetailsshallbeuploadedinthewebsiteofICAI

For further details, please contact: Secretariat of the International Affairs Committee, The Institute of Chartered Accountants of India, ICAIBhawan, PB No. 7100, Indraprastha Marg, New Delhi –110002,India.+911130110443fax+911130110591, :[email protected]

CPE

Hours6 Seminar on Capital Market at Kolkata

Organized by: Committee for Members in Industry & Committee on Financial Markets & Investors’ Protection of ICAI

Hosted by: EIRC of ICAI

Date & Time Venue

Date: September 11, 2010 (Saturday) Time: 9.30 a.m. to 5.45 p.m. Hotel Oberoi Grand, Kolkata

ThemeIndian Capital Market – its growth potential and challenges

Topics to be Discussed Speakers

First Technical Session: 10.30 am to 1.00 pm

Chairman Mr.M.S.Sahoo,WholetimeDirector,SEBI*

CapitalMarket–TheRoadAhead CA.S.P.Tulsyan,Mumbai

Impact of European Upheaval on WorldEconomy

Mr.HemalKampani,Kolkata

Implication of Hedge Fund on Indian CapitalMarket

Ms.MollyThamby,Kolkata

Second Technical Ses-sion: 1.45 pm to 3.45 pm

Chairman Mr.PratipKar

WealthCreationthroughcommonsense CA.NileshShah,Mumbai

AnnualReports&WealthCreation Mr.MudarPatheryaIndianEquityMarket Mr.JosephMassey,Mumbai

Panel Discussion:3.45 pm to 5.45 pm CapitalMarketforInclusiveEconomicGrowth

Anchor:Mr.GovindEthiraj,MumbaiPanellists: CA. S. P. Tulsyan, CA. Nilesh Shah, Mr.JosephMassey,CA.A.P.Singh,CA.ArunJagatramka,Mr.RavinderKumar*&Othereminentdignitaries

Fees: R1,500/-

For Registration and Further DetailsDeputy Secretary, EIRC of ICAI, ICAI Bhawan, 7, Anandilal Poddar Sarani (Russell Street), Kolkata – 700 071.

:033-30211132/33/04:[email protected] should be drawn in favour of “The Institute of Chartered Accountants of India, EIRC”

*To be Confirmed

EVENTS


526

CPE

Hours15 HRST-I: Hyderabad Residential Service Tax – Intensive

Organised by: Indirect Taxes Committee of ICAI Hosted by: Hyderabad Branch of Southern India Regional Council of ICAI

Date & Time VenueOctober 22, 23 & 24, 2010 [Friday, Saturday, Sunday]The Programme will commence at 1:00 pm on Octo-ber 22, and conclude at 2:30 pm on October 24.

Centre of Excellence, Gachibowli, Hyderabad

ThemeIn-depth Examination of Some Major Issues in Service Tax: An Analytical and Interactive ApproachTheWorkshopaims tohavea threadbareanalysisof fewservice taxprovisionsasalsodeliberationsoncomplex issuesarisingintaxableservicesthroughinteractivemodeslikecasestudiesandgroupdiscussionstobeguidedbytheexpertsinthefield.

Participantsareexpectedtohavebasicknowledgeofservicetaxlaw.

Topics to be Discussed SpeakersMethodstoMaximizeCENVATCredit CA.AshokBatra

CaseStudyonReplytoDepartmentAuditNote CA.AshokBatra

ClassificationofTaxableServices–PracticalIssues CA.P.RajendraKumar

LegalAspectsrelevanttoServiceTax ShriK.S.Ravishankar,Advocate

CaseStudyonLegalAspects Moderatedby:ShriK.S.Ravishankar,AdvocateLedby:CA.RajeshKumarT.R.

CaseStudyonClassification-PharmaceuticalResearch Moderatedby:CA.A.R.KrishnanLedby:CA.RajivJ.Luthia

Renting of Immovable Property Service and ConstructionServices–PracticalIssues

CA.A.R.Krishnan

CaseStudyonProportionateCreditMechanism ShriK.Vaitheeswaran,Advocate

CaseStudyonReply toShowCauseNotice in respect ofCENVATcreditbyaGoodsTransportAgency

ShriK.Vaitheeswaran,AdvocateLedby:CA.DeepakJain

ImportofServices–PracticalIssues CA.S.Thirumalai

Fees• R6,000perresidentialparticipant(inclusiveofstaycost,breakfast,lunchanddinner)ontwinsharingbasis• R4,000pernon-residentialparticipant(inclusiveofbreakfastandlunch)

Cheques/demand drafts should be made in favour of “Hyderabad Branch of SIRC of ICAI” payable at Hyderabad. Please also mention your name, membership number and contact details at the back of the cheque/demand draft.

Outstation registration limited to 50 Local registration limited to 10

For Registration and Further Details:040-23393182:[email protected]

The detailed announcement will be hosted on the website www.icai.org shortly.

Backpage


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INDEX


21st COUNCIL PHOtO, 1389

A WOMAN – CA. sHWetA DHAkA, 43

ACkNOWLeDGeMeNt• StillVigilantMembersfromVintageTimes,63

ACCOUNtANt’s BROWseR, 142, 285, 459, 662, 804, 984, 1166, 1308, 1490, 1684, 1876, 2039

ACCOUNtING • Seeunderheading“Article”

ACCOUNtING stANDARDs• Seeunderheadings“ExposureDrafts”and“Standards”

ARtICLeACCOUNTING• AccountingforIntangibleAssetsandDepreciationinIndia–Dr.PradeepKumarSingh,424

• RecognitionofCostandRevenueofComputerSoftware–Mr.S.P.Dhandayuthapani,592

• IntellectualCapitalReporting-AnOverview,CA.(Dr.)ShitalJhunjhunwala,742

• IFRSforSMEsinIndianScenarioSimplificationofIFRSApplication-CA.BhupendraMantri,914

• IFRSforSMEs-StepTowards-CA.(Dr.)A.L.Saini,920

• RoleofInternalAuditorsinTransitiontoIFRS-CA.SantoshKhandelwal,1248

• ForensicAccounting:ProcessandScope-Dr.R.Parameswaran,1251

• AccountingforandIssuerelatedtoPriliminary/ShareIssueExpenses–CA.KevinDaftary,1643

• IPSAS:HarmonisingGovernmentAccountingwithCommercialAccounting-CA.G.Srinivas,1758

• ReportingandDisclosureof

IntangibleAssetsofSelectedITCompaniesinIndia-Dr.P.K.RathoreandSangitaPrajapati,1766

• ChangingovertoAccrualSystemofAccountingbyCentralAutonomousBodies&CentralUniversities-Mr.B.S.RamaswamyandDr.A.M.Sherry,1775

• AgricultureandIFRS:ApplicationReviewofIAS41-Agriculture(TheFairValue…)-CA.SunilKumarBeria,1783

• FinancialInstruments:Recognition&MeasurementUndertheIFRSFramework-CA.AnuragSingal,1790

• ImprovementsandDevelopmentstoIFRSs-CA.(Dr.)A.L.Saini,1942

• IFRS3-BusinessCombination:AnOverview-CA.BhupendraMantri,1955

• IFRSinRealEstate–ATechnicalAreaMorethanJustAccounting&Reporting-CA.SunilKumarBeria,1963

AUDITING• FraudInvestigation–AnOverview,CA.JaydeepSinghChopra749

• IntangibleAssets-AnAdventtoInternalAudit-CA.ArpinderSingh,924

• ValuationAuditunderCentralExciseAct,1944-CA.RaviHolani,1471

• Internal/ConcurrentAuditofInvestmentFunctionsofInsuranceCompanies-CommitteeonBanking,InsuranceandPension,1974

• AnIndextotheAuditofEducationalInstitutions-CA.S.S.Subramanian,1978

BANKING AND FINANCE• EconomicMelt-downandImpactonIndia-Prof.AtulSharma,47

• ConservationofCapitalInvest-mentsThroughDepreciationwith

SpecialReferencetoSSIUnits,CA.J.P.SinghandA.P.Singh,127

• RoleofCharteredAccountantsinBankingSector–CA.AnujGoyal,279

• M&ADealDocumentsandCertainKeyDealConvenants–CA.ShantanuNeogi,448

• EarnedValueAnalysisforProjects–C.R.Venkataramani,635

• ElectronicPaymentsande-BankinginIndia:AnOverview–CA.LavanyaGupta,783

• ValuationPracticesinEmergingMarkets:IssuesInvolvedinVariousAreas-Ms.RichaDani,1134

• LeveragingActivity-BasedCostingtoEnhanceEnterpriseValue-CA.ShubhaSubramanian,1140

• CurrencyFutures:AnInsight-CA.SuparnaMazumdar,1145

• BroadeningAccesstoFinance:NewDimensionsofDevelopmentBankinginIndia-Dr.ManojPillai,966

• EvolvingTake-OutFinanceScheme-AFundingDeviceforInfrastructureProjects-CA.ShailendraSharma,1300

• MoneyLaunderingandFinancingofTerrorism–AStudyonMethodstoFightMoneyLaunderinginIndia&USA-Dr.AnuradhaGupta,1650

• BehaviouralFinance:ARoadLessTravelled-Prof.S.S.Khanka,1658

• FinancialStabilityandDevelop-mentCouncil-CA.SrinivasYanamandra,1839

• PrivateEquity-AnOverview-CA.NishantK.Patel,1843

• GlobalEconomicCrisisandInnovativeCost-ControlTechniques:AnAssessment-Dr.PradeepKumarSingh,2019

BANK AUDIT• AuditofInvestmentsinaBank’sTreasury-CA.AkeelMasterandCA.AshwinSuvarna,1427

Index of Volume 58 [July, 2009 to June, 2010] of The Chartered Accountant*

527

*No(s) in italic after each entry denotes page no(s)

INDEX


• ApplicationofPrinciplesofMaterialityinBankAudit-CA.H.AnilKumar,1432

• AnOverviewofBankBranchAudit-CA.AbhijitSanzgiri,1441

• ConductingStatutoryBranchAuditinCBSEnvironment:AnApproach-CA.IshwarChandra,1447

• LongFormAuditReportinCaseofBankBranches-CA.AjayKr.Jain,1452

CORPORATE AND ALLIED LAWS• IndependentDirectors–LiableforCrimesforCompanies–CA.AnupP.Shah,115

• SocialSecurityforUnorganisedSector-NewPensionScheme–CA.V.K.Gupta&Dr.AnuradhaGupta,628

• ‘Employee’-AConfusingTermUnderEmployeeProvidentFundAct,1952–Mr.S.M.Jain,780

• ReverseMortgage:AWalkingStickatOldAge-CA.BarkhaJindal,1112

• ChangingSpectrumoftheSocialSecurityLawinIndia-CA.ParizadSirwalla,1118

• LimitedLiabilityAct:PlethoraofPenalties-CAChandraShekar,1290

• AvailableRightsandBenefitstoMicro,SmallandMediumEnterprises-CA.NelaturSyamasundaran,1668

• HowwillYouWill?-S.M.Jain,1821

• InspectionunderSection209AofCompaniesAct1956:WaystoOvercomePerilsofInspection-G.S.Bhabhra,1824

• IntellectualPropertyLeague:ImportanceofIPinIndianPremiereLeague-RodneyD.RyderandSuryakantKashyap,1831

• InterCorporateLoansandAdvances-CA.S.Nirupama,2010

• RighttoInformationAct-AnOverview-AbhayKumarSethia,2014

CORPORATE GOVERNANCE• CorporateGovernance-RahulBajaj,44

• CorporateGovernance:Pointsto

Ponder-RakeshMohan,946• CorporateGovernanceinCentralPublicSectorEnterprises-Mr.K.P.SasidharanandCA.R.K.Yadav,1284

DIAMOND JUBILEE SPECIAL• RoleofCharteredAccountantsinBoomingInsuranceSectorinIndia-J.HariNarayan,40

• CorporateGovernance-RahulBajaj,44

• EconomicMelt-downandImpactonIndia-Prof.AtulSharma,47

• PublicAccountabilityofPublicEnterprises:C&AG’sOversightRole-K.P.Sasidharan,51

• ClimateChange-TheChallengesBeforeIndia-Dr.Sanjay Tomar,61

ENTERPRISE RESOURCE PLANNING (ERP)• EnterpriseResourcePlanningSAP:AnOverview-CA.VairavanSitambaram,1673

ENTERPRISE RISK MANAGEMENT• TheGlobalDemandforEnterpriseRiskManagersandtheEmergenceoftheRiskIntelligentEntity–CA.DeepakWadhawan,796

FOREIGN TRADE• DFISHolders-SufferersorWinners-CA.PradeepJain,974

GENERAL• PublicAccountabilityofPublicEnterprises:C&AG’sOversightRole-K.P.Sasidharan,51

• ClimateChange-TheChallengesBeforeIndia-Dr.SanjayTomar, 61

• ChiefExperienceOfficer(CExO)–CA.SunilGandhi,476

• TimeManagementforWorkingPeople-CA.SujathaPadmanabhan,1180

• VipassanaMeditation-AMasterToolforLifeBalance-CA.PramodJain,1320

GLOBAL PERSPECTIVE• AJourneyfromIndiatoUK-LettheWisdomPrevail–CA.ShahwatiMajumdarWilkiinson,123

HEALTH• HealthTips-CA.R.S.Agarwal,

162, 316, 475, 697, 847, 1025, 1184, 1318

• HealthforCharteredAccountants–CA.SanjayManoharKshirsagar,163,

• WomenHealth-HomeCureandYogicTechniques-CA.R.S.Agrawal,1184

• Nature’sPanaceatoHumanBeing-CA.R.S.Agarwal, 1025

• HighBloodCholesterol:ItsSymptoms,CausesandMeansofGeneralCare-CA.R.S.Agarwal,131

• VipassanaMeditation-AMasterToolforLifeLifeBalance-CA.PramodJain,1320

IFRS• IFRSforSMEsinIndianScenarioSimplificationofIFRSApplication-CA.BhupendraMantri,914

• IFRSforSMEs-StepTowards-CA.(Dr.)A.L.Saini,920

• RoleofInternalAuditorsinTransitiontoIFRS-CA.SantoshKhandelwal,1248

• AgricultureandIFRS:ApplicationReviewofIAS41-Agriculture(TheFairValue…)-CA.SunilKumarBeria,1783

• FinancialInstruments:Recognition&MeasurementUndertheIFRSFramework-CA.AnuragSingal,1790

• ImprovementsandDevelopmentstoIFRSs-CA.(Dr.)A.L.Saini,1942

• IFRS3-BusinessCombination:AnOverview-CA.BhupendraMantri,1955

• IFRSinRealEstate–ATechnicalAreaMorethanJustAccounting&Reporting-CA.SunilKumarBeria,1963

INDUSTRY – SPECIFIC • ImplementationofERPinPowerGenerationCompanies-CA.A.B.L.Srivastava,960

INFORMATION TECHNOLOGY• SensitivityAnalysiswithMS-Excel–DataTableandScenarioManager–CA.LiyakataliG.Lal,646

528

INDEX


• XBRL-AGreatBoontoFinancialReporting-CA.JayshreeNara-yanan,1295

INSURANCE• RoleofCharteredAccountantsinBoomingInsuranceSectorinIndia-J.HariNarayan,40

• AccountingProfessionals:IssuesinProfessionalIndemnityInsurance-CA.AmreshVashisht,1482

• WaytoaPeacefulSecuredLife:RightFinancialPlanningthroughLifeInsurance-CA.RamakrishnanVenkataraman,2030

INTERNATIONAL TAXATION• TriangularCasesInvolvingPaymentsofInterestbyaDualResidentCorporationandItsImplicationunderTaxTreaties-CA.RashmiLodha,1128

• Section206AAofIncome-taxAct,1961–WhetheraNightmareforNon-Residents?-CommitteeonInternationalTaxationoftheICAI,1796

• Cross-BorderMovementofPersonnel–ServicePEIssues-CommitteeonInternationalTaxationoftheICAI,1983

KNOW YOUR FUTURE• ThisMonthforYou-PujaMathur,

176, 356, 537, 700, 850, 1028, 1187, 1326

LIMITED LIABILITY PARTNERSHIP• LimitedLiabilityPartnership-Concept,LawandTaxationIssues–CA.KetanDave&CA.SudinSabnis,251

• LimitedLiabilityPartnershipAct,2008:AUser’sPerspective–CA.AnilKumarAgarwal&CA.AnuragSingal,260

• ConversiontoLimitedLiabilityPartnership–CA.AnandPagaria,266

• AuditofLimitedLiabilityPartnerships–CA.MilanHazra,271

• WingingUpandDissolutionofLLP–CA.(Dr.)A.L.Saini,275

• LimitedLiabilityAct:Plethoraof

Penalties-CAChandraShekar,1290

• ProposalsforChangeinConversiontoLLPandMAT-CA.ChandrashekharV.Chitale,1618

• LimitedLiabilityAct:PlethoraofPenalties-CAChandraShekar,1290


MANAGEMENT• AnalysisofBusinessDistressPrediction-CA.HiteshB.Agarwal,132

• FeasibilityStudy—AWideningApproach–CA.AnjushaGupta,454

• AppraisalofBusinessPerformance:AFinancialPerspective–CA.(Dr.)NikhilZaveri&Dr.SubhashM.Joshi,639

• SharedService–AJourneytoExcellence–CA.SandhyaSriram,1149

MARKETING• RoleofBrandinginBusinessValueProposition-Dr.B.K.Mohanty,1847

NATION BUILDING• ProfessionandPolitics:AReview-CA.KailashKumarGadhvi,957

PROFESSIONAL OPPORTUNITY• RoleofCharteredAccountantsinBankingSector–CA.AnujGoyal,279

• FinacialModelling:AnOpportunityforCAs–CA.AnuragSingal,773

PROFESSIONAL AVENUE• HowtoBecomeCPA-USA-CA.SudhirKumarShukla,953

TAXATION • Section69Bvs.Section50CoftheIncomeTaxAct–AnanalyticalStudy–CA.S.C.Jain,103

• RefundofServiceTaxforExportersofGoods–Provisionsataglance–CA.DeepakKalani, 107

• NewProvisionsforTaxationofGifts–CA.G.Ramaswamy,236

• ServiceTaxPerspective–CA.A.K.Batra,239

• IndirectTaxation–AnAnalysis–CA.MadhukarN.Hiregange,247

• TaxationAspectsofFilmProducer–CA.HemrajS.Joshi,431

• TDS/TCSCompliances/ITRsFiling–AnOverview–CA.MaheshAgarwal,438

• TaxabilityofPrincipalAmountofLoanWaivedUnderOneTimeSettlementScheme(O.T.S)–CA.R.Sreenivasan,443

• InterestAllowableonCapitalBorrowed–AnInterestingThought–CA.SailendraSharma, 600

• ValuationofTaxableServiceUnderWorksContractCompositionScheme–EffectofAmendments–CA.S.RangaSwamy,607

• PreparingforGoods&ServiceTax–CA.R.S.Bhatt,613

• RateofTaxes,TaxDeductedatSource&NewPensionSchemeinDirectTaxesCodeBill,2009–CA.VimalPunmiya,623

• HousingProjectsandRecentSpecialBenchDecision–CA.VardhamanL.Jain,759

• SpecialProvisionsforTaxationofCo-operative/OtherBanks–CA.DarshanJain,764

• AmendmenttoDefinitionof‘BookProfits’inSections115JA&115JBbyFinance(No.2)Act,2009-ImpactonBanks-CA.DhariniShah,1122

• TreatmentofInterestonBorrowingsinFinancialAccountingandIncomeTax-CA.(Prof.)RamuKrishnamurthi,936

• IssuesinRelationtoSection2(22)(e)oftheIncome-taxAct,1961-CA.KrishBhikhalalDesai,942

• DoubleTaxationinIndirectTaxLaw-AnalysingtheChallengeThroughtheSIMCardCaseStudy-VatsalGaur,930

• Capitalvs.RevenueExpenditure-AJourneytoUnendingControversy-CA.ManojGupta,1257

• ElectoralTrust-CA.AadeshKumarAgarwal,1264

• NoDiscretionisAvailableUnderSection80ofFinanceAct,1994toImposeLesserPenality-CA.M.Govindarajan, 1268

529

INDEX


• BusinessAuxiliaryvs.SupportServices-SimilaritiesandDifferences-CA.DeepakKalani,1273

• TaxationAspectsofTradinginCurrencyDerivatives-CA.S.B.Gupta,1277

• ServiceTaxProposalsundertheFinanceBill,2010-CA.RaviHolani,1628

• AnalysisofLatestChangesEffectedinCENVATRulesinFinanceBill,2010-CA.AshokBatra,1635

• ExpandedScopeofConstructionServices-CA.TusharK.Doctor,1640

• TaxabilityUnderCentralSalesTaxActonInterstateTransferofGoodsforJobWork-CA.SanjayK.Agarwal,1646

• DepreciationforInfrastructureCompanies-ShantanuJ.Pendse,1802

• CanGovernmentRetainMATCreditafterExpiryofPeriodLaidDowninSection115JAAofIncome-taxAct,1961?-CA.RaghubirSingh,1808

• TaxationofServicesReceivedfromOutsideofIndia:ImportofServices-CA.(Dr.)SanjivAgarwal,1811

• Section192,TDS:SalariesPayableOutsideIndia-CA.TusharGandhi,1990

• BeattheVAT;Say‘Fryum’isPapad-NelaturSyamasundaran,1996

• RoyaltyandFeesforTechnicalServices:TreatmentinDTAAsandtheIndianIncome-taxAct,1961-CA.AdarshRamanujan,1999

UNION BUDGETBUDGET 2009-2010:• SalientFeaturesoftheFinance(No.2)Bill,2009-DirectTaxes-CA.VedJain,223

• NewProvisionsforTaxationofGifts–CA.GRamaswamy, 236

• ServiceTaxPerspective–CA.A.K.Batra,239

• IndirectTaxation–AnAnalysis–CA.MadhukarN.Hiregange,247

BUDGET 2010-11:• SalientFeaturesofFinanceBill,

2010-CA.VedJain,1602• User-FriendlyProposalsintheUnionBudget-CA.T.Banusekar,1614


• IssuesonAmendmentsinDeductionsbyFinanceBill,2010-CA.BarunKumarGhosh,1622

• ServiceTaxProposalsundertheFinanceBill,2010-CA.RaviHolani,1628

• AnalysisofLatestChanges EffectedinCENVATRulesinFinanceBill,2010-CA.AshokBatra,1635

• ExpandedScopeofConstructionServices-CA.TusharK.Doctor,1640

VASTU SHASTRA• PlacementofMainGate,KitchenandSittingRoom-KashyapNitinPathak,174

• PositionandPlacementofBedroom-KashyapNitinPathak,354

• It’sTimetoThinkAbouttheAlmighty!-KashyapNitinPathak,535

• PlacementofStudyRoom-KashyapNitinPathak, 698

• SignificanceofWaterinVastuShastra-KashyapNitinPathak,848

• ACharteredAccountant’sOffice-KashyapNitinPathak,1026

• AManufacturingUnit-KashyapNitinPathak,1185

• PlanetsandtheIndustryorBusinesstheyRepresent-KashyapNitinPathak,1324

WOMEN & CAREER• GenderInclusivityandOpportunitiesatWorkplace–CA.GargiRay,652

WOMEN AND PROFESSION• WomenSteeringGroup-ICAI’sFuturisticInitiativeforWomenEmpowerment-CA.PriyaBhansali,1074

• WomenEmpowerment-EnvisionaFuture-Dr.AnuradhaGupta,1078

• EmpowermentofWomen:India’s

Imperatives-CA.(Dr.)GeetaDas,1087

• EmbracingWomanhood-CA.JessikaArora,1094

• WaystoBalanceWorkandFamilyLife-CA.IshitaBose,1098

• ChangingRolesofWomen-AnOverviewintothePerceptionofWomenOverTimeinIndia-CA.RushotiRoy,1102

• GodLivesThereWhereWomenaretobeWorshipped-GenderViewpoint-Dr.VidhiAgarwal,1106

WTO• RegionalTradeAgreements:RoadAheadforAgriculturalSector–CA.RajayKumarAggarwal,790

XBRL• XBRL-UnleashingtheAccountingCodes–CA.T.V.MohandasPai&CA.GargiRay,400

• XBRLtoRevolutioniseFinancialReportingandAnalysisGlobally–CA.OliverServais,406

• eXtensibleBusinessReportingLanguage-AnOverview–NavneetSaxena,409

• XBRL-ADynamicToolForFinancialReporting–CA.AnuragSingal,417

• XBRL-AGreatBoontoFinancialReporting-CA.JayshreeNarayanan,1295

AUDItING• Seeunderheading“Article”

AUDItING stANDARDs• Seeunderheadings“ExposureDrafts”and“Standards”

BACk PAGe• Crossword,SmilePlease,177,

357, 538, 701, 866, 873, 1092, 1193, 1372, 1554, 1717, 1898, 2061

BANk AUDIt• Seeunderheading“Article”

BANkING AND FINANCe• Seeunderheading“Article”

BeHAVIOURAL FINANCe• Seeunderheading“Article”

530

INDEX


BOOk ReVIeW• ‘InternationalAccounting’–AUsefulBookforStudentsaswellasProfessionals,1491

• ACompleteGuideonIssuesofIncomeTax&WealthTax, 1492

• RoleofBrandinginBusinessValueProposition,1855

BUsINess AUXILIARY seRVICe• Seeunderheading“Article”

CABF DONORs, 1734, 2053

CAReeR WAtCH, 574, 1691, 1870

CHIeF eXPeRIeNCe OFFICeR (CeXO)• Seeunderheading“Article”

CIRCULARs AND NOtIFICAtIONs• Seeunderheading“LegalUpdate”

• SuggestedListofRelevantRBICirculars,1468

CLAssIFIeDs, 139, 301, 378, 696, 849, 1024, 1177, 1316, 1500, 1687, 2053• Seealsounderheading“ICAINews”

CLIMAte CHANGe• Seeunderheading“Article”

COMPUte sOFtWARe• Seeunderheading“Article”

CONstRUCtION seRVICes • Seeunderheading“Article”

CO-OPeRAtIVe/OtHeR BANks • Seeunderheading“Article”

CORPORAte & ALLIeD LAWs• Seeunderheading“Article”

CORPORAte GOVeRNANCe• Seeunderheading“Article”

CPA-UsA • Seeunderheading“Article”

CROssWORD-Seeunderheading“BackPage”

CURReNCY FUtURes• Seeunderheading“Article”

DIAMOND JUBILee CeLeBRAtIONs• ICAIDiamondJubileeCelebrations:AGlimpse,77

• Seeunderheadings“Article”and“ICAINews”

DIAMOND JUBILee sPeCIAL• Seeunderheading“Article”

DIsCIPLINARY CAse• Seeunderheading“LegalUpdate”

eAC OPINION• ProvisionforLTCbenefitsprovidedtoemployees,136

• ValueofMaterialinTransit, 221

• Accountingforexpenditure incurredonevacuationofaccumulatedashintheashdyke,398

• Classificationofcompulsorilyconvertibledebenturesinthebalancesheetasequity-whetherappropriate,590

• RevenuerecognitionfromsaleofWEGs,andprovidingInstallation,Commissioningandotherrelatedservices,739

• DeterminationofCurrentLiabilities,911

• Whetheracompanyregisteredundersection25oftheCompaniesAct,1956shouldprepareincomeandexpenditureaccountorprofitandlossaccount,1072

• Accountingforforeignexchangevariationpriortocommencementofcommercialoperation,1248

• Treatmentofpreliminaryexpensesincurredonincorporationofacompany,1424

• Discloserincashflowstatementofborrowingsandloandisburse-mentsandrelatedrepaymentsincaseofafinancialinstitution, 1599

• Virtualcertaintyinrespectofdeferredtaxassets,1755

• Capitalisationofexpenditures

inrespectofprojectsunderconstruction,1937

eCONOMIC UPDAte, 135, 284, 458, 661, 803, 983, 1165, 1306, 1489, 1679, 1878, 2038

eDItORIAL• AJourneyofExcellence,3• LimitedLiabilityPartnership,183• ChallengesBeforeIndianEconomy,363

• IndiaBoostsGlobalEconomicRecovery,543

• IFRSforSmallandMedium-SizedEntities,707

• GoodsandServicesTax,871• EmpoweringWomen–TheRoadAhead,1035

• IndianTrusts(Amendment)Bill,2009,1199

• MeetingtheChallengeofBankAudit,1379

• UnionBudget2010-11,1559• GovernmentAccounting,1723• IFRSConvergenceandIndia,

1903

e-LeARNING ON IFRs, 314

eLeCtIONs• Electionto21stCounciland20th

RegionalCouncils,83• Election-2009 1. ElectiontoTwentyFirst

CouncilandTwentiethRegionalCouncils,306

2. ElectionCodeofConduct,673

3. Election2009Notifications,678

eLeCtORAL tRUst • Seeunderheading“Article”

eNteRPRIse ResOURCe PLANNING (eRP)• Seeunderheading“Article”

eNteRPRIse RIsk MANAGeMeNt• Seeunderheading“Article”

e-sAHAAYAtAA• Seeunderheading“ICAINews”

eVeNts, 156, 309, 312, 378, 663, 810, 993, 1856, 2055

531

INDEX


eXPOsURe DRAFtsACCOUNTING STANDARD• AccountingStandard1(Revised20XX)(CorrespondingtoIAS1)PresentationofFinancialStatements,317

• AccountingStandardforLocalBodies(ASLB)5,683


• AccountingStandards25(Revised20XX)1(CorrespondingtoIAS34),999

• AccountingStandard(AS)4(Revised20XX)(CorrespondingtoIAS10),EventsAftertheReportingPeriod,1188

AUDITING STANDARD• InvitationtocommentsontheExposureDraftofStandardonInternalAudit(SIA),ConsiderationofLawsandRegulationsinanInternalAudit.,168

• StandardonAuditing(SA)320(Revised):MateriailityinPlanningandPerforminganAudit,335

• StandardonAuditing(SA)402(Revised):AuditConsiderationrelatingtoanEntityUsingaServiceOrganisation,339

• StandardonAuditing(SA)450:EvaluationofMisstatementIdentifiedDuringtheAudit, 347

• StandardonAuditing(SA)610(Revised):UsingtheworkofInternalAuditors,351

• StandardonAuditing(SA)200(Revised),481

• StandardOnAuditing(SA)710(Revised),493

• StandardOnAuditing(SA)800,498

• StandardOnAuditing(SA)805(Revised):SpecialConsiderations-AuditsofFinancialStatementsPreparedinaccordancewithSpecialPurposeFrameworks,498

• StandardOnAuditing(SA)810:EngagementstoReportonSummaryFinancialStatements,508

• StandardonAuditing(SA)220(Revised):QualityControlforanAuditofFinancialStatements, 820

• StandardonAuditing(SA)501(Revised):AuditEvidence-SpecificConsiderationsforSelectedItems,826

• StandardonAuditing(SA)520(Revised):AnalyticalProcedures,830

• StandardonAuditing(SA)505(Revised):ExternalConfirmations,834

• StandardonAuditing(SA)620(Revised):UsingtheWorkofanAuditorsExpert,840

STANDARD ON ASSURANCE ENGAGEMENTS• StandardonAssuranceEngagements(SAE)3000AssuranceEngagementsotherthanAuditsorReviewsofHistoricalFinancialInformation, 1546

STANDARD ON REVIEW ENGAGEMENTS• StandardonReviewEngagements(SRE)2410InterimFinancialReportingReviewofInterimFinancialInformationPerformedbytheIndependentAuditoroftheEntity,1010

FILM PRODUCeR • Seeunderheading“Article”

FINANCIAL INstRUMeNts• Seeunderheading“Article”

FINACIAL MODeLLING• Seeunderheading“Article”

FLAsHBACk• ICAIDiamondJubileeCelebrations:AGlimpse,77

FOReIGN tRADe• Seeunderheading“Article”

FOReNsIC ACCOUNtING• Seeunderheading“Article”

FRAUD INVestIGAtION• Seeunderheading“Article”

FROM tHe PResIDeNt, 6, 186, 366, 546, 710, 874, 1038, 1202, 1384, 1562, 1726, 1906

FROM tHe VICe PResIDeNt, 12

GeNeRAL• Seeunderheading“Article”

GLOBAL eCONOMIC CRIsIs• Seeunderheading“Article”

GLOBAL PeRsPeCtIVe• Seeunderheading“Article”

GOODs AND seRVICe tAX• Seeunderheading“Article”

HeALtH• Seeunderheading“Article”

ICAI ACHIeVeMeNts • InformationTechnology,1212• Infrastructure,1231• GoingGlobal,1234• PartnerinNationBuilding,1237• ProfessionalOpportunities,1239• StudentServices,1242• ResearchActivities,1245

ICAI COMMIttees 2010–11, 1493

ICAI’s CORPORAte CONCLAVe, 1167

ICAI CORPORAte FORUM, 805, 996

ICAI HeADQUARteRs, 67

ICAI INItIAtIVes• ICAIGreenInitiative,461• ICAI’sInitiatives&Activities-AReport,556

ICAI JOB PORtAL, 295, 598, 2052 ICAI NeWs• DiamondJubileeCelebrations,82• ICAICongratulatesShriSalmanKhurshid,85

• InvitationforResearchProposals,145

• NewPublicationfromResearchCommittee,146

• E-learning-CBTTrainingModules,146

• EmpanelmentoffacultymembersfortrainingCAStudentsfortheExamination,147

532

INDEX


• MembersPracticinginIndividualname,147

• AnAppealRe:Ensuringeffectivepracticaltraining,148

• OnlineFacilitiesonInstituteWebsite-AnOverview,149

• Member’sIdentityCard,149• SecondmentofArticles[Regulation54,Para2.11ofTrainingguide],150

• MembershipandCertifiacteofPracticeFeefortheyear2009-2010,151

• ERPCoursesonSAPFA&MAModules&MicrosoftDynamicsNAV,151

• AnnouncementregardingworkinghoursoftheArticledAssistants,152

• NewPubilcationfromCommitteeonTradeLawsandWTO,153

• ImportantCouncilDecisions-TransferofArticles,154

• Announcement(forMandatoryCompliance)-IndianCAfirmshavingaffiliationwithInternationalentities/network,155

• IssuanceofExposureDraftofAccountingStandard16(revised),155

• Non-BankingFinancialCompaniesAuditor’sReport(ReserveBank)Directions,2008,288

• FormationofCPEStudyCirclesforMembersinIndustry,291

• QuestionnaireonCapacityBuildingMeasuresforCAFirms&Members,292

• ICAIJobPortal,295, 598, • Transfer/TerminationofArticleship,[Regulation56(1)],296

• AnnouncementfromCommitteeonPublicFinance,296


• NewPublications,299• VapiBranchNotification,300 • BU-ICAIJointEducationProgramme,301

• Classifieds,301• CertificateCourseonERMatMumbai,302

• CampusPlacementProgrammeforNewlyQualifiedCharteredAccountants,303

• RequesttoContributeArticlesonXBRL,304

• ERPCoursesonSAPFA&MA

Modules&MicrosoftDynamicsNAV,305

• EmpanelmentofMemberstoActasCo-ordinators/ObserversintheCAExaminationCentres,305

• Election–2009,Seeunderheading“Election-2009”

• ImportantAnnouncement–NextCharteredAccountantExaminations,308

• PaymentofAnnualMembership/CertificateofPracticeFeefortheYear2009-10,308

• ICAIAwardsforExcellenceinFinancialReporting,464

• AmendmenttoSQC1-RetentionPeriodforEngagementDocum-entation(WorkingPapers),466

• LaunchofISACoursee-Learning,466

• RecentICAIe-Initiatives,467• FormationofIndustrySpecificGroupsofMembersinIndustry,468


• CampusPlacementProgrammeforNewlyQualifiedCharteredAccountants-August-September,2009,470

• EmpanelmentofResourcePersonstoactasFaculty,471

• NewPublications,472• ForKindAttentionofallMembersoftheCharteredAccountantsBenevolentFund,473

• ForKindAttentionofallMembersoftheS.VaidyanathAiyarMemorialFund,473

• InvitationforExpressionofInterest,474

• EmpanelmentofResourcePersonsinCASLB,514

• EmpanelmentofResourcePersonsinCGA,526

• UsingCAATS/GAS&UsingMS-Excel2007asanAudittool,536

• MergerofFirms-Seniority/FirmNameIssues,571

• NewPublications,664• InvitationtoJoinPanelofExaminers,668

• ScholarshipsfromTheS.VaidyanathAiyarMemorialFund,668

• ERPCourses,669• PermissionforPursuingaCoursealongArticleship,670

• ICAIAwardsforExcellenceinFinancialReporting,671

• ICAI’sCorporateConclave,1167• InvitationforResearchProposals,

672• NewPublications,811• SingleWindowHelpDeskforCharteredAccountantsinService/IndustryRelatingtoMembershipofICAI,812

• FormforIntimatingtheICAIaboutEngagementsAccepted,813

• InvitationforExpressionofInterestforAuthoringPublications,814

• AppealtoContributeforFloodRelief,815

• CPEStudyCircleforMembersinIndustryofICAI,816

• HelpLineDeskforNovember2009CAExaminations,817

• ‘WomenEmpowerment’–RequesttoContributeArticles,817

• HighCourtofDelhiDirectstoAccordExemptiontoICAI-ARFunderSection10(23)(c)(iv)oftheIncome-taxAct,1961,818

• NonReceiptofPolicyCertificateof“CABFGroupTermInsuranceScheme”,818

• CFOGuild(CorporateAccountantsGuild)andMembersinIndustryGuild,986

• SingleWindowHelpDeskforCharteredAccountantsinService/Industry,986


• EmpanelmentofCharteredAccountantFirmsfortheYear2010-2011,988

• InvitationforFaculty&CaseStudiesforPostQualificationCourseonInformationSystemsAudit,989

• PopularisingBrandCAinGulfCo-operationCouncil(GCC)Countries,989

• RegistrationsforNextBatchofCertificateCourseonValuation,990

• ExposureDraftofXBRLBankingTaxonomy,990

• InvitationForResearchProposals,1170

• PlacementPortalofICAI,1171• NewPublication,1171• JoinNowforISAAssessmentTest-June2010,1172

533

INDEX


• CompilationofFirmsDataason1stJanuary,2010,1172

• Non-ReceiptofJournal,1172• EmpanelmentofCharteredAccountantFirmsfortheYear2010-11,1174

• ImportantAnnouncementonEmpanelmentfortheyear2010-11,1174

• RequesttoContributeintheJournal,1174

• CampusPlacementProgrammeforNewlyQualifiedCharteredAccountants-February-March,2010,1176


• BranchNotification,1310• EmpanelmentofCharteredAccountantFirmsfortheYear2010-11,1310

• BreachofRegulation65&78-NonsubmissionofForm112,1312

• AnnouncementfortheAttentionoftheMembers,1312

• PublicationsbyCommitteeonInformationTechnology,1313

• ElectionNotifications,1314• ICAIe-Learning,1317• NewReleases,1498• NewPublications,1499• CommonProficiencyTest,June,2010,1501

• CharteredAccountantsExam-inations,May,2010,1502

• HalfYearlyCertificatefromStatu-toryAuditorsofNBFCs,1503

• CampusPlacementProgrammeforNewlyQualifiedCharteredAccountants–March,2010, 1504

• BranchNotifications,1505• RequesttoContributeintheJournal,1535

• LastDateofRegistrationforPostQualificationCourseinInternationalTradeLaws&WTOforNovember2010PartIExaminations,1685

• ERPCourses,1685• AnnouncementonGuidanceNoteonAuditofBanks,1686

• QueriesRelatingtoAuditofBanksandBankBranchesRelatingtoFY2007-08,1686

• BankAuditsfortheFYended31.03.2010,1686

• ImportantAnnouncement,1687• Classifieds,1687• AdditionalDisclosuresbyBanksinNotestoAccounts,1688

• RequestofProposalsforDevelopmentofStudyMaterial,1690

• Non-ReceiptofJournal,1690• MultipurposeEmpanelmentFormfortheYear2010-11,1736

• RevisedSyllabusandBackgroundMaterialsforthePostQualificationCourseonInformationSystemsAudit(ISA),1861

• SummerPlacementProgramme–June,2010forexperiencedandfreshCharteredAccountants,1862

• InvitationtoJoinCFOGuild/MembersinIndustryGuild,1862

• CommitteeonPublicFinanceandGovernmentAccountingInvitationtoContributeArticles,1863

• FormationofCPEStudyCircleforMembersinIndustryofICAI, 1863

• InvitationtoSendQuotesforPrintingWorkoftheICAIJournal,TheCharteredAccountant, 1864

• ForTheAttentionOfMembersMembershipandCertificateofPracticeFeefortheyear2010-2011,1865

• e-Learning-CBTModulesbyCommitteeonInformationTechnology,ICAI,1866

• InvitationforEmpanelmentofServiceMaintenanceAgenciesforPlacementPortal,1867

• Corrigendum,1867• ICAIJobPortal(http://jobs4cas.icai.org),1868

• “e-Sahaayataa”-ANewGrievanceResolutionMechanism,1918

• AdvisoryforMultipurposeEmpanelmentForm(MEF)fortheyear2010-11,2040

• SampleMEF2010-11forPartnershipFirm,2041

• InvitationtoWorkasResourcePersons&toContributeArticles,2045

• ExpertAdvisoryCommitteeofICAI,2045

• ImplementationofSection51AofUnlawfulActivities(Prevention)Act,1967,2046

• InvitationtoJoinPanelofExaminers/Paper-setters,2046

• InvitationforArticlesonXBRL,2047• NewPublicationsfromtheInternalAuditStandardsBoardo TechnicalGuideonInternal

AuditofConstructionIndustry,2048

o TechnicalGuideonInternalAuditofEducationalInstitutions,2048

• NewPublicationfromtheResearchCommitteeo TechnicalGuideon

AccountingforSEZsDevelopmentActivities,2049

• SpecialPlacementProgramme–June,2010,2050

• InvitationforEmpanelmentofServiceMaintenanceAgenciesforPlacementPortal,2050

• InvitationtojoinCFOGuild/MembersinIndustryGuild,2051

• FormationofCPEStudyCircleforMembersinIndustryofICAI, 2051

• ICAIJobPortal(http://jobs4cas.icai.org),2052

• Classifieds2053• CABFDonors,2053• ‘TransferPricing’eLearningCourse,2053

• ArticlesInvitedforStudents’Journal,SpecialIssue,2054

• Corrigendum,2054

IFRs• Seeunderheading“Article”

INDeXIndexofVolume57(July,2008toJune,2009 of The Chartered Accountant,851

INDUstRY sPeCIFIC• Seeunderheading“Article”

INFORMAtION teCHNOLOGY• Seeunderheading“Article”

INFRAstRUCtURe• ICAIInfrastructureRoundup-ICAIHeadOffice,67-WesternRegion,68-SouthernRegion,70-EasternRegion,73-CentralRegion,74-NorthernRegion,76

534

INDEX


INFRAstRUCtURe COMPANIes • Seeunderheading“Article”

INsURANCe• Seeunderheading“Article”

INtANGIBLe Assets• Seeunderheading“Article”

INteLLeCtUAL CAPItAL RePORtING• Seeunderheading“Article”

INteRNAL AUDItOR • Seeunderheading“Article”

INteRNAtIONAL tAXAtION • Seeunderheading“Article”

INteRNAtIONAL UPDAte, 141, 282, 461, 659, 802, 982, 1163, 1305, 1488, 1682, 1874, 2036

IPsAs• Seeunderheading“Article”

kNOW YOUR COMMIttee• CommitteeonInformationTechnology,143

• ExpertAdvisoryCommittee,992

kNOW YOUR etHICs, 192, 382, 572, 718, 890, 1052, 1216, 1246, 1406, 1572

kNOW YOUR FUtURe, 176, 356, 537, 700, 850, 1028, 1187, 1326

LIMIteD LIABILItY PARtNeRsHIP• Seeunderheading“Article”

LeGAL UPDAte• Circulars&Notification,100, 216,

394, 584, 732, 904, 1066, 1228, 1420, 1468, 1592, 1750, 1934

• DisciplinaryCase,99, 220, 397, 589, 737, 910, 1065, 1230, 1424

• LegalDecisions,384, 575, 720, 894, 1054, 1218, 1408, 1580, 1740, 1920

LeGeNDs IN tHe ACCOUNtING tRADItION OF INDIA: seRIes• ShriK.S.Aiyar,1854

• ShriSorabjiS.Engineer,2033

MANAGeMeNt• Seeunderheading“Article”

MAt CReDIt • Seeunderheading“Article”

MessAGe, 14,

MONeY LAUNDeRING• Seeunderheading“Article”

Ms-eXCeL• Seeunderheading“Article

NAtIONAL BUILDING• Seeunderheading“Article”

NAtIONAL UPDAte, 140, 460, 657, 801, 981, 1161, 1307, 1487, 1680, 1872, 2034

NOstALGIA, 38, 83

NOtIFICAtIONs• Seeunderheading“LegalUpdate”

OBItUARY• PastPresidentCA.RahulRoyPassesAway,878

ONe tIMe settLeMeNt sCHeMe (O.t.s)• Seeunderheading“Article”

OUR NeW PResIDeNt, 1382

OUR NeW VICe-PResIDeNt, 1383

PAtH BReAkING INItIAtIVes, 372

PHOtOGRAPHs, 86, 194, 374, 554, 716, 882, 1046, 1207, 1389, 1390, 1570, 1736, 1914

PRACtICe UPDAte• EnhancingAuditQuality,

138• Non-CompliancewithReportingObligations,979, 1158, 1871

PRIVAte eQUItY • Seeunderheading“Article”

PROFessIONAL OPPORtUNItY• Seeunderheading“Article”

PROFessIONAL AVeNUe• Seeunderheading“Article”

PROFILe• NewSecretary,MCA,552• OurNewPresident,1382• OurNewVice-President,1383

RBI CIRCULARs, 1468

ReADeRs WRIte, 190, 550, 714, 880, 1044, 1384, 1568, 1734, 1912

ReAL estAte•Seeunderheading“Article”

ReGIONAL tRADe AGReeMeNts• Seeunderheading“Article” RePORts• ICAIPresidentsVisittoSpainandPolandAccompanyingPresidentofIndia,88

• ReportonICAI’sAfricaDayCelebrations,90

• ICAIDelegationVisitsBahrain,92• ReportonICAIpresidentsvisittoLondon,94

• ReportonICAIDelegationVisittoDubai, 96

• InternationalConference–“WindsofChallenges–GlobalStrategiesforAccountingProfession”, 198

• ICAISignsMoUwithICAAandJointDeclarationswithCGA-CanadaandBIBF,208

• Reporton‘CADay’CelebrationsCoincidingwithDiamondJubileeoftheICAI,210

• ICAICentreofExcellenceatHyderabadLaunched,212

• PathBreakingInitiatives,372 • FoundationStoneofICAI’sCA.RameshwarThakurCentreofExcellencelaidinBangalore,areport,380

• ICAIStudyTourofAustralia, 884

• ICAIAbuDhabiChapterSilverJubileeFunction,886, 888

535

INDEX


• GCCConference–Areport, 1245

• ReportonICAI’s60AnnualFunction,1394

ReVeRse MORtGAGe• Seeunderheading“Article”

ReVIeW eNGAGeMeNts• Seeunderheadings“ExposureDrafts”and“Standards”

RIGHt tO INFORMAtION ACt (RtI)• Seeunderheading“Article”

seRVICe tAX• Seeunderheading“Article”

sMILe PLeAse• Seeunderheading“BackPage”

sPeCIAL ADDRess• MinisterofCorporateAffairsShriSalmanKhurshid,1574

stANDARDsACCOUNTING STANDARDS• AccountingStandardforLocalBodies(ASLB)5,1358


AUDITING STANDARDS• StandardsonAuditing(SA)320(Revised),335

• StandardsonAuditing(SA)402(Revised),339

• StandardsonAuditing(SA)450,347


• StandardsonAuditing(SA)210(Revised):AgreeingthetermsofAuditEngagements,515

• StandardonAuditing(SA)265:CommunicatingDeficienciesinInternalControltoThoseChargeswithGovernanceand Management,527


• StandardonAuditing(SA)705, 1339


• StandardonInternalAudit(SIA)17,1353

• StandardonAuditing(SA)200(Revised)OverallObjectivesoftheIndependentAuditorandtheConductofanAuditinAccordancewithStandardsonAuditing,1508

• StandardonAuditing(SA)220(Revised)QualityControlforanAuditofFinancialStatements,1521

• StandardonAuditing(SA)501(Revised)AuditEvidence–SpecificConsiderationsforSelectedItems,1527

• StandardonAuditing(SA)505(Revised)ExternalConfirmation,1531

• StandardonAuditing(SA)520(Revised),AnalyticalProcedure,1536

• StandardonAuditing(SA)620(Revised),UsingtheworkofanAuditor’sExpert,1540

• StandardonAuditing(SA)710(Revised):ComparativeInformation-CorrespondingFiguresandComparativeFinancialStatements, 1693

• StandardonAuditing(SA)800:SpecialConsiderations-AuditsofFinancialStatementsPreparedinAccordancewithSpecialPurposeFrameworks,1699

• StandardonAuditing(SA)805:SpecialConsiderations-AuditsofSingleFinancialStatementsandSpecificElements,AccountsorItemsofaFinancialStatement,1703

• StandardonAuditing(SA)810:EngagementstoReportonSummaryFinancialStatements,1709

REVIEW ENGAGEMENTS• StandardonReviewEngage-ments(SRE)2400(Revised)*:EngagementstoReviewFinancialStatements,1879

• StandardonReviewEngagements(SRE)2410:ReviewofInterimFinancialInformationPerformedbytheIndependent

AuditoroftheEntity,1885

tAX AUDIt• Seeunderheading“Article”

tAX DeDUCteD At sOURCe (tDs)• Seeunderheading“Article”

tAXAtION• Seeunderheading“Article”

tRADING IN CURReNCY DeRIVAtIVes • Seeunderheading“Article”

tRUsts• Seeunderheading“Article”

UNION BUDGet• Seeunderheading“Article”

VALUe ADDeD tAX• Seeunderheading“Article”

VAstU sHAstRA• Seeunderheading“Article”

VIPAssANA MeDItAtION • Seeunderheading“Article”

WeBCAst• ICAIWebcastChannel,286

WOMeN AND CAReeR• Seeunderheading“Article”

WOMeN AND PROFessION• Seeunderheading“Article”

WOMeN HeALtH• Seeunderheading“Article”

WOMeN steeRING GROUP• Seeunderheading“Article”

WORks CONtRACt • Seeunderheading“Article”

WORksHOPs, 214

WtO• Seeunderheading“Article”

XBRL• Seeunderheading“Article”n

536

2010September Icai Journal

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Transcript of 2010September Icai Journal