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Archive for March, 2007

Are Accountants perceived like this today

Monday, March 26th, 2007

Do the Accountants have this image today. Share your thoughts replying the blog…

Posted in Wits and Speech | No Comments »

ICAI unhappy with relaxation of audit norms

Sunday, March 18th, 2007

The first impression that come to mind when you read this statement

“Almost 35-40% of CA firms, especially the smaller ones, will be hit by the RBI directive,” said the ICAI president Sunil H Talati

Hey… This must be some Trade Union Leader.

Then you further read on

“It leaves the banking system open to malpractices and frauds. This is a dangerous situation,” Talati said. He ruled the RBI did not even consult the institute, which regulates the audit function in India. While the ICAI has already written to the banking regulator about its arbitrary decision and its adverse fallout on the banking industry, he said the matter was also being discussed at the institute’s ongoing central council meeting.

Well, Mr Tahati, the business has to decide how much reassurances are required on internal controls. At the end of the day, the banks auditors have to report on true and fair view of final accounts.

What surprises to me, in India, the Accounting has been controlled by ICAI. Just like monopoly that leaves public little scope to choose.

For e.g. services provided by cost accountant or company secretary can also be provided by Chartered Accountant firms. This provides a choice for the companies to avail the services from best professional firms. However when it comes to financial accountancy, the companies are left with no choice but to avail services of members of ICAI.

It would be worth considering, how is the accounting/auditing profession monitored in developed countries.

United Kingdom

Companies Act 1989: Appointment of Company Auditor

25.—(1) A person is eligible for appointment as a company auditor only if he—

(a) is a member of a recognised supervisory body, and

(b) is eligible for the appointment under the rules of that body.

(2) An individual or a firm may be appointed a company auditor.

There are 5 Accounting bodies who are recognised to audit the accounts of the companies.

Similarly Australia has 3 bodies, Canada 2 bodies. This acts as a checks and balance in the profession. Moreover the Accounting & Auditing Standard Boards are independent of Accounting bodies.

In India, the accounting profession should be liberalised. Currently the accounting and auditing standards are issued by ICAI. The GOI has delegated all the work in this area to ICAI. As you can see that ICAI has shown trade union tendencies protecting the interests of its practising firms rather than user of its services i.e. the general public.

I am yet to find a website National Advisory Committee on Accounting Standards and role that it plays for what it stands for.

India needs a couple accounting bodies that trains it members through public accounting or employment route. Further National Advisory Committee on Accounting Standards should have the full authority to frame accounting and audit standards instead of ICAI. None of the accounting bodies should be able to issue accounting standards… Logically speaking you cannot audit your own accounts.

Company Secretary: Pursuant to Section 383 A of the Company Act, 1956, companies having a paid-up share capital of Rs. 50 lakhs or more are statutorily required to appoint a while-time company secretary. Membership of the Institute is the only prescribed qualification, which a person must possess for appointment as company secretary in such a company.

This is a restrictive practise. Member of other accounting bodies or law should also be eligible to hold the position of company secretary.

Last but not the least, what CMD of UBI has to say about relaxation of audit norms:

The relaxation has, however, been welcomed by bankers, who said it would lead to faster finalisation of accounts and help in controlling costs. “It is a welcome step and will help banks finalise their accounts within a reasonable time-frame,” United Bank of India CMD P K Gupta said.

He added that it would increase the efficiency of the banking system.

At the end of the day, it is the better industry practices and controls that should emphasised on rather than audits.

Regards,

Santosh Puthran
AICWA

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Posted in Financial Accounting, ICAI | 4 Comments »

"What an Awesome Reply, man!"

Sunday, March 11th, 2007

There should be always humor at workplace. I picked this joke since this may happen during month end pressure. Will you have guts to tell your boss…

It was a hot meeting at the office conference hall. All the people from the department had been called. The V.P was all tensed up. The mood was so bad.My friend asked me, “Hey, what is this meeting all about?

I said, “Maybe, they will decide on when to have the next meeting.”

People around smiled at each other. Then the V.P started talking. It was about the recent attrition rate, that was so high. Around 10 people had put in their papers - all experienced guys. It was the quarter-end and so, work was huge.

“If we do not complete the work on time, we need to be paying heavy penalty”, said the V.P.

The V.P then turned to the manager and said, “Hey… take how much ever resources you want. Recruit or take them from other departments, butcomplete the work in another 25 days. Take people and complete it, man. “

To this, the sweet manager replied “Sir, give me one wife and nine months and I shall show you results, but DON’T give me nine wives and one month. I just cannot do anything.”

Everyone looked at him blank………

The V.P was not prepared for this answer.

We looked at the manager and thought, “What an Awesome Reply, man!”

Your comments ….please…

Cheers,

Santosh Puthran

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Difference between the legal form of the transactions and their substance

Monday, March 5th, 2007

I came across a case study question on how to treat transaction and event in Financial statements as per UK FRS.

Question:

“On 1 October 2005 Angelino Ltd owned a freehold building that had a carrying amount of £7·5 million and had an estimated remaining life of 20 years. On this date it sold the building to Finaid for a price of £12 million and entered into an agreement with Finaid to rent back the building for an annual rental of £1·3 million for a period of five years. The auditors of Angelino have commented that in their opinion the building had a market value of only £10 million at the date of its sale and to rent an equivalent building under similar terms to the agreement between Angelino and Finaid would only cost £800,000 per annum. Assume any finance costs are 10% per annum.

Describe how the above transactions and events should be treated in the financial statements of Angelino Ltd for the year ended 30 September 2006. Your answer should explain, where relevant, the difference between the legal form of the transactions and their substance.”

Answer: (as per UK FRS)

This is an example of a sale and leaseback of a property. Such transactions are part of normal commercial activity, often being used as a way to improve cash flow and liquidity. However, if an asset is sold at an amount that is different to its fair value there is likely to be an underlying reason for this. In this case it appears (based on the opinion of the auditor) that Finaid has paid Angelino £2 million more than the building is worth. No (unconnected) company would do this knowingly without there being some form of ‘compensating’ transaction. This sale is ‘linked’ to the five year rental agreement. The question indicates the rent too is not at a fair value, being £500,000 per annum (£1,300,000 – £800,000) above what a commercial rent for a similar building would be.

It now becomes clear that the excess purchase consideration of £2 million is an ‘in substance’ loan (rather than sales proceeds – the legal form) which is being repaid through the excess (£500,000 per annum) of the rentals. Although this is a sale and leaseback transaction, as the building is freehold and has an estimated remaining life (20 years) that is much longer than the 5 year leaseback period, the lease is not a finance lease and the building should be treated as sold and thus derecognised.

The correct treatment for this item is that the sale of the building should be recorded at its fair value of £10 million, thus the profit on disposal would be £2·5 million (£10 million – £7·5 million). The ‘excess’ of £2 million (£12 million – £10 million) should be treated as a loan (long-term liability). The rental payment of £1·3 million should be split into three elements; £800,000 building rental cost, £200,000 finance cost (10% of £2 million) and the remaining £300,000 is a capital repayment of the loan.

Any ideas… how the above scenario will be treated in Financial Statements/Accounting as per Indian Accounting Standards ?

Regards,

Santosh Puthran
AICWA

Posted in Financial Accounting | No Comments »

Activity based costing … how to collect the information

Saturday, March 3rd, 2007

We accountants have the fancy of solving the toughest management accounting problem in the examination just like forecasting of Mumbai weather. The above screenshot (click on the image to view it bigger) is a examination question from one of the professional examination.

I am not asking the readers to solve the problem and give right answers. But share comments as how you would prospose to gather information for “Actuals” especially for pt. 3 and pt 4.

You are the Management Accountant of Kickstart Ltd and your management has asked you to prepare Actual Profit & Loss and compare it with the budgeted accounts. How would you go about doing it.

Make assumptions and conclude.

Regards,

Santosh Puthran
AICWA

Posted in Management Accounting | 1 Comment »