Questions deserving attention by ICAI, MCA and RBI

Sr. No

AS PER

But, AS PER

COMMENTS

1

RBI - Standard Assets:

A case for a relook of certain provisions/liabilities in the presentation/ disclosures in the Balance Sheet: In this contest, it is highly proper to revisit certain areas to mull over the presentation / disclosures in the Balance Sheet as to certain provisions in Schedule IV-5 on Other Liabilities and Provisions to examine as to whether a relook is highly appropriate and demanding. As stated earlier, Standard assets are not NPAs as on the date and exhibit no symptom of loss except normal risk.

 Whether it will qualify for provision to present as 'Other liabilities and Provisions' under 'Capital & liabilities'? Or is it not more appropriate and justified if the presentation is suitably changed?

 

As per AS/Ind.AS/ICAI Guide Line:

The following items are specifically referred to on 5. 05 IV- 5 on others (Including Provisions) in the Guidance note - (Schedule 5 Other Liabilities and Provisions - item IV. Others (including provisions) APPENDIX II.

The Third Schedule to the Banking Regulation Act, 1949 (See Section 29) FORMS 'A' Form of Balance Sheet (b) Surplus in bad and doubtful debts provision account (such surplus is in the nature of a reserve). (c) Surplus in provisions for depreciation in securities (such surplus is in the nature of a reserve). (d) Contingency funds, which are actually in the nature of reserves but are not disclosed as such.

All the above three items are highly vocal and specific in declaring in the GN that they are more in the nature of reserve/contingent reserve. As pointed out earlier, 'Standard Assets' are not NPAs as on date and sprout no indication of loss except normal risk that does not
 appear to warrant provision under AS/Ind.AS purview

If examined without any bias/ prejudice, RBI should rightly consider presenting them as 'Contingent Reserve' (of course net of tax) with appropriate clarificatory notes Besides, it will 'give true and fair' view that's kernel any presentation and disclosure.

It is high time RBI, in this respect, should address the call sooner than later of this presentation. :

 

2

Share capital as Per Companies Act  2013:

Section 2(84) of the Companies Act defines 'share' as 'a share in the share capital of a company and includes stock'. While, section 2(30) of the Act defines 'debenture' to 'include debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not'. Further, section 43 of the Act gives two kinds of share capital of a company limited by shares viz,

(a) Equity share capital;
(b) Preference share capital.

As Per Ind.AS:

On the other hand, Ind. AS 32 defines an equity instrument as 'any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities'. The accounting definition of 'Equity' is principle based as compared to the legal definition of 'Equity' or 'Share', such that any contract that evidences residual interest in an entity's net asset is termed as 'Equity' irrespective of whether it is legally recognized as a 'Share' or not.

How presented in Ind.AS Balance Sheet?

Instruments entirely equity in nature, may be presented as a separate line item on the face of the Balance Sheet under 'Equity' after 'Equity Share Capital' but before 'Other Equity', as shown below:

Equity

(A) Equity Share Capital

(B) Instruments entirely equity in nature - (It is assumed that Instruments entirely equity in nature have such terms and conditions that qualify them for being entirely equity in nature based on the criteria given in Para 16 of Ind. AS 32. Companies should assess terms and conditions specific to their instruments for deciding whether they are entirely equity in nature).

(a)Compulsorily Convertible Preference Share
(b) Compulsorily Convertible Debentures
(C) Other Equity

As per Division II Schedule III, relating to Ind.AS., Equity includes 3 items mentioned against A, B and C in the third column.

The Note against the same should include only items of the same nature.

Therefore, the question naturally arises as to where to disclose the Authorised Preference Capital?

Unless issued with conversion class to Equity, it does not fit in to the clan of Equity. Until then, it appears appropriate it is disclosed along with other Disclosures under the Note required under General Instructions on the Note instead of in the Note on Equity.

MCA should necessarily consider this positively in consultation with ICAI.

3

SQC 1 - Independence Confirmation:

As per the Annexure 1 (vide SQCI) on illustrative Annual Firm Personnel Independence Confirmation, the first declaration is 'During the period, I or my immediate family members did not have any investments in an entity to which I rendered assurance services etc.'

AS per Section 141(3)(1) of the Companies Act 2013:

Section 141(3)(1)) to be read with the rule concerned 10 on disqualifications of auditor. To quote, (1) For the purpose of proviso to sub-clause (i) of clause (d) of sub-section (3) of section 141, a relative of an auditor may hold securities in the company of face value not exceeding rupees one lakh:

Provided that the condition under this sub-rule shall, wherever relevant, be also applicable in the case of a company not having share capital or other securities:

Provided further that in the event of acquiring any security or interest by a relative, above the threshold prescribed, the corrective action to maintain the limits as specified above shall be taken by the auditor within sixty days of such acquisition or interest It is high time the ICAI has make necessary amends in line and tune with The Companies Act

 

The ICAI has issued Standard on Quality Control (SQC1) on April 2008withImplementation Guide to facilitate discharge of professional responsibilities that inter alia covers convergence with international standards.

The ICAI should initiate action to correct the situation in line with The Companies ACT 2013 to avoid confusion.

4

Section 144 of The Companies Act 2013:

The section on 'Auditor not to render certain services' is a new 'Avatar' & has no equivalent provision in 1956 companies Act. It expressly indicates  the services not to be rendered by the auditor/s obviously inserted to ward off situations that may cause threat to independence and that the root for that malady is nipped in the bud. 

Sec. 141 on 'Eligibility, qualifications and disqualifications of auditors' has enlarged the provisions on this core as compared to corresponding section 226 of the earlier Act. In the light of sea changes in the various provisions of the Companies Act 2013 the responsibilities & the obligations following there from have increased by leaps & bounds.

Further, the Companies Act, 2013 has introduced various sections according to which auditors have been exposed to the criminal proceedings.

SQC 1:

Deals with Independence of Auditors on a specific Chapter.

Para 27 of the SQC1 on rotation appear a little out-dated as compared to the Companies Act,2013 section 139(2) to be read with rule there under. For brevity, the same has not been quoted.

Again, the Implementation Guide on Ethical requirements Para 2.5 suggests a criteria for senior Personnel also-- recommends 5 years or more on Audit or on attestation engagement.

Though the Chartered Accountants Act 1949 as updated, Code of Ethics, the Council's General Guidance, FAQ&A throw light on the subject, these are primarily issued before the New Act. Therefore, it goes without saying that it is high time ICAI would rise to the call to address these problems to update SQC1 along with practical Frequently Asked Question& Answer model in a columnar table format so as to  achieve the target and the desired-results.
 

5

Audit Engagement Letter SA 210 on Agreeing the Terms of Audit Engagements:

Auditors based on above said Standard prepare Audit Engagement letter in the format (form and content) highlighted in Pare A 22 and A 23 of the said Standard and based on suggested / relevant Illustrated Audit Engagement   Letter.

Any Need On Stamped Paper-any legal requirement:

Of late, certain clients based on their legal advice ask for the Audit Engagement letter on a stamped paper.

The Institute would like to consider the issue in the context of the law of the land.