Ministry of Corporate Affairs has done a remarkable job for the industry by issuing notifications with regard to Common Cost Accounting Record Rules, 2011 and six other Specific Cost Accounting Record Rules. Earlier there were 44 Cost Accounting Record Rules for different Industries and Cost Records were required to be prepared as per specific formats mentioned under those rules i.e. different formats for different Industries. Now as all the old notifications with regard to cost records have been abolished, the companies are required to maintain the cost records in any formats provided the records are capable of filling in the information in formats as are required under Cost Audit Report Rules. The Cost records should be compliant with Cost Accounting Standards (14 as of now) and Generally Accepted Cost Accounting Principles.
Presently there are Seven Cost Accounting Record Rules covering all the companies fulfilling certain criteria like Rs 5 crore networth or Rs 20 crores turnover or listed company.
The Seven Cost Accounting record Rules are :
|Cost Record Rules Existing As of Now||Nature of Rules|
|Companies (Cost Accounting Records) Rules, 2011||
Common Cost Record Rules
|Cost Accounting Records (Electricity Industry) Rules, 2011||
Specific Cost Record rules
|Cost Accounting Records (Fertilizer Industry) Rules, 2011|
|Cost Accounting Records (Petroleum Industry) Rules, 2011|
|Cost Accounting Records (Pharmaceutical Industry) Rules, 2011|
|Cost Accounting Records (Sugar Industry) Rules, 2011|
|Cost Accounting Records (Telecommunication Industry) Rules, 2011|
This is the high time all the CFOs take a note of the new Cost Accounting Record Rules wherein now the responsibility of preparation and maintenance of Cost Records has been shifted to Board of Directors. The company is supposed to file a Compliance certificate with the Ministry of Corporate Affairs after approval by the Board of Directors and with signatures of Directors/CS etc.. The Compliance Certificate in the prescribed format must be signed by a Cost Accountant.
Realising the importance of in-house cost accountants, the Ministry of Corporate Affairs has given the authority to sign the Compliance Certificates to In-house Cost Accountants also as well as to Practising Cost Accountants.
Through this article, I would like to take you to certain important aspects of the Balance Sheet Finalisations wherein CFO must exercise caution:
a) Inventory Valuations:
The important point in Cost Compliance Certificate is the reconciliation as given below:
|Net Margin (Profit/Loss) as per Cost Accounts|
|A. From Produced / Manufactured Product Groups|
|B. From Services Groups|
|C. From Trading Activities|
|Total as per Cost Accounts|
|Add: Incomes not considered in Cost Accounts (if any)|
|Less: Expenses not considered in Cost Accounts (if any)|
|Add/Less: Difference in Stock Valuation|
|Profit/(Loss) as per Financial Accounts|
The details of “Add/Less: Difference in Stock Valuation” will be arrived at by computing:
|1||Add: Overvaluation of closing stock in financial accounts|
|2||Add: Undervaluation of opening stock in financial accounts|
|3||Less: Undervaluation of closing stock in financial accounts|
|4||Less:: Overvaluation of opening stock in financial accounts|
So, the CFOs must try to take the inventory valuations form the cost records so that minimum and justified differences are reported to the Ministry of Corporate Affairs. Ideally, there difference will be due to Net Realisable Value Impact and Excise duty Impact in FG only and there should not be any difference in WIP and RMC valuations.
Please note that Audited Financials and Cost Compliance Certificate incorporating Reconciliation Statement for the year 2011-12 have to be approved by Board of Directors for the very first time and we should be ready to face the questions from the BOARD on differences in Inventory Valuations reported in Cost Compliance Certificate.
Inventory Valuations have a direct impact on the profitability of the organization. What will happen if Income Tax Authorities ask for the details of the differences in Inventroy Valuations which is reported to the Ministry of Corporate Affairs after approval from the Board of Directors and accept the same as is mentioned in the Cost Records after minor modifications? Going forward, the top management of the organization must look into these aspects related to Income Tax.
b) Reconciliation of Excise Records with the Cost Records:
Now, as the preparation and maintenance of cost records has been made mandatory and product group wise/service group wise profitability has to be reported to MCA in the reconciliation specific attention is required for preparation of cost records aligining all the cost statements with the Excise Returns/Service Tax returns.
Not only this , in case of a company having multi locational plants and where there are inter plant transfers or Related Party Transfers, the company should exercise due diligence in the cost records as the assessable value for clearance of goods to other Plants and Related Parties, the Statutory Cost Records may be relied upon by the Excise Authorities as the costing there will have approval of Board of Directors and signature of Directors and Cost Accountant.
The top management must take note of the new developments wherein alignment of Excise records and Cost Records has already begun. The issue of Cost Audit orders in May 2011 are testimony to it wherein Cost Audit Orders were issued based on Excise Classification Codes.
Now again Draft Product group codes have been released based on four digit HSN Classification Codes. Also the draft service group codes have been released. Please refer to the reconciliation statement given above where profit as per product group or service group has to be reported to Ministry of Corporate Affairs
Apart from it, the companies are required to prepare the reconciliations in the following format as part of Cost Records:
|RECONCILIATION OF INDIRECT TAXES (for the company as a whole)|
Cess & Others
|Stock Transfers (Net)|
|Others, if any|
|Cenvat/VAT Credit Utilised-Inputs|
|Cenvat/VAT Credit Utilised- Capital Goods|
|Cenvat/VAT Credit Utilised- Input Services|
|Cenvat/VAT Credit Utilised- Others|
|Paid through PLA/Cash|
|Total Duties/Taxes Paid|
|Difference between Duties /Taxes Paid and Recovered|
c) XBRL and Cost Records:
The top management of the organization must take into account the fact that draft taxonomy for Cost Compliance Certificate and Cost Audit reports have already been released and these may get finalized before the due date i.e. 27/09/2012 for filing with Ministry of Corporate Affairs on the lines of Balance Sheet Filing in XBRL. So, while preparing the cost records, the taxonomy released should also be kept in mind
From the above, it can be concluded that before signing of the Final Accounts, due consideration should be given to the Cost Records prepared under New Cost Record Rules so as to avoid any problems in future with regard to Inventory Valuations, Excise or Income Tax .
Navneet Kumar Jain
FCMA., MBA., LL.B., M.COM., PGDTL., AIIISLA., LIII
Practising Cost Accountant