Audit Quality Review Report & AS queries
NFRA issues Audit Quality Review Report of the Statutory Audit of IL&FS for F.Y. 2017-18
In pursuant to section 132(2)(b) of the Companies Act, 2013 and NFRA Rules, 2018, The National Financial Reporting Authority (NFRA) has issued the Audit Quality Review Report (AQRR) of the Statutory Audit of IL&FS Financial Services Ltd. for the financial year 2017-18. This AQR was conducted to ensure the compliance with relevant accounting and auditing standards and to assess the need of any disciplinary proceedings under the act.
For detail refer link:-https://accountsandaudit.taxmann.com/fileopennew.aspx?id=222330000000020840&mode=home&page=
Amendment of Schedule VII
Central Government hereby makes the following further amendments in Schedule VII to the said Act, namely:-
In the said Schedule, for item (ix) and the entries thereto, the following item and entries shall be substituted, namely:-
“(ix) (a) Contribution to incubators or research and development projects in the field of science, technology, engineering and medicine, funded by the Central Government or State Government or Public Sector Undertaking or any agency of the Central Government or State Government; and
(b) Contributions to public funded Universities; Indian Institute of Technology (IITs); National Laboratories and autonomous bodies established under Department of Atomic Energy (DAE); Department of Biotechnology (DBT); Department of Science and Technology (DST); Department of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH); Ministry of Electronics and Information Technology and other bodies, namely Defense Research and Development Organisation (DRDO); Indian Council of Agricultural Research (ICAR); Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research (CSIR), engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs)”.
http://www.mca.gov.in/Ministry/pdf/NotificationCompAct_26082020.pdf
AS 13: Identifying purpose of an investment is necessary to classify it as trade investment
Query
A Company say, X ltd. is engaged in the business of providing long term finance for infrastructure projects through direct lending, refinancing, etc. X Ltd., held its resources in the form of bank deposits, loans to infrastructure projects and also investments in its subsidiaries and other infrastructure companies. Further, the company also holds bonds of Non- Banking Finance Companies- Infrastructure Finance Companies. The business activities of the investee companies are considered to be activities for in relation to trade promotion of X Ltd.
X Ltd. classified all the above investments in subsidiaries, other infrastructure companies and Non- banking Finance Companies as trade investments. Whether X Ltd. is correct in classifying the above investments as trade investments?
Answer
As per Note 6(k)(i) of General Instructions for Preparation of Balance Sheet to Revised Schedule III of Companies Act, 2013, non-current investment shall be classified as ‘trade investment’ and ‘other investments’. Trade investment is defined neither in Revised Schedule III to Companies Act, 2013, nor in any accounting standard. However, as per explanations provided in Guidance Note to Schedule III (revised), investment made by a company in shares or debenture of another entity to promote trade or business of the company shall be considered as trade investment.
Further, trade investments can be in the form of equity instruments or debt instruments. Thus, it depends more on the purpose/ intent of an investment rather than its legal form to classify an investment as trade investment. With regards to investment in an entity to promote own trade or business, intent can be determined from the facts and circumstances of the case along with the nature of investment, type of business of the investee company, etc.
Therefore, to determine the correctness of the company in classifying the above investments as trade investments, it depends on the facts and circumstances of the case as discussed above.
References
– EAC opinion Query 46, Volume 34
– Opinion finalized on 6 February 2015
– AS 13
AS 16: Borrowing costs not to be capitalized for a period when construction is obstructed by locals
A Company, X ltd. is engaged in the business of construction and operation of hydro-electric power project (hereinafter referred as ‘project’). The project is divided into three stages i.e. pre-construction, construction and testing & commissioning and would take overall 8 years to set up. Due to fear of being affected by the construction, local people have raised safety issues and blocked the access to roads to the project. This has resulted in the interruption of construction activities and the company is facing delay in work due to public issues.
During the interruption period, the company continued the technical and administrative work related to project which includes dam studies, hydraulic model studies, preparing report to planning commission, etc. Also, the company has been in regular touch with the government for resumption of work and as a result most of the public concerns have been addressed.
While preparing its books of accounts, the company has capitalized the borrowing cost incurred during the period of interruption considering that hydraulic projects are very susceptible to time and various other reasons in the concerned area. In addition, the company has also capitalized the administrative and other general expenditure incurred during the period of interruption as per AS 10. Whether the company is correct in its accounting treatment as per relevant accounting standard?
Answer
No, the company is not correct in its accounting treatment as per relevant accounting standard.
As per para 17 of AS 16 Borrowing Costs, capitalization of borrowing cost should be ceased during the period in which active development is interrupted. However, the capitalization is not ceased during the interrupted period if technical and administrative work is being carried out or temporary delay is a necessary part of getting the asset ready to use.
In the instant case, the project is interrupted because of the safety issues raised by the local people. The company made continuous efforts for resumption of construction works and carried out certain technical and administrative work as remedial measures so that the matter gets resolved. Such technical and administrative works do not relate to active development/ construction of the project. Further, agitation of local people cannot be considered as temporary delay as per the provisions contained in the standard. Therefore, the capitalization of borrowing costs incurred during the interrupted period should be suspended and charged to Statement of Profit and Loss.
With regard to capitalization of administrative and other general overhead expenses during the interrupted period, as per the provisions contained in AS 10, while capitalizing an item of cost to asset only those items of costs should be capitalized that are directly attributable to the acquisition/ construction of asset/ project. In the absence of information regarding the nature of expense incurred, the company should capitalize the administrative and other general overhead only if they facilitate development/ construction of the project.
References
– EAC opinion Query 5, Volume 34
– Opinion finalized on 11 April 2014
– AS 10 (old) & AS 16