The Ministry of Corporate Affairs, Government of India vide its communication dated August 11,2017 had requested suggestions/comments on the proposed changes in respect of above rules, last issued titled Companies (cost records and audit) Amendment Rules, 2014 Though the last date of submission of suggestions has already lapsed, the writer wants to draw the attention of cost accountants/chartered accountants and company secretaries on the proposed changes which is intended to be disruptive in nature and provoke new thinking.

For information, the details of websites from MCA are given below which contain the full details:

Draft Companies (cost records and audit) Amendment Rules, 2017

Summary of changes as per Draft Companies (Cost Records and Audit) Amendment Rules, 2017

Though the writer would love to write details of the full draft rules; however, due to constraint of time and space, concerned auditors or users of the cost reports can easily verify the original rules for detailed knowledge and future implementation.

Now to understand the full changes to be included for our information, definitely drawn from the notice referred above, the following details, pointwise, have been given:

Summary of changes as per Draft Companies (Cost Records and Audit) Amendment Rules, 2017 FORM CRA-1 (Pursuant to rule 5(1) of the Companies (Cost Records and Audit) Rules, 2014) Particulars relating to the Items of Costs to be included in the Books of Accounts. Proposed changes stand in bold letters. Though I have tried to comment on proposed changes, most of them connote the constant effect of new Indian Accounting Standards which for obvious reasons would revolutionize our thinking and embark on new areas, till now unknown, 

Para 1(e) Material costs

“Spares which are specific to an item of equipment shall not be taken to inventory, but shall be capitalized with the cost of the specific equipment. Cost of capital spares or insurance spares, whether procured with the equipment or subsequently, shall be amortized over a period, not exceeding the useful life of the equipment.

 In case of companies to which Indian Accounting Standards apply, items such as spare parts, stand-by equipment and servicing equipment are recognized as property, plant and equipment when they meet the definition of property, plant and equipment and depreciated accordingly. Otherwise, such items are classified as inventory.”

My observation:

It is amply clear that the proposed changes arise on account of new Ind AS standards which necessitate the changes.

1(g)

Subsidy or Grant or Incentive and any such payment received or receivable with respect to any material shall be reduced from cost for ascertainment of the cost object to which such amounts are related.

 In case of companies to which Indian Accounting Standards apply, any such Grants recognized as deferred income shall be reduced from the cost of materials in the financial year when such deferred income is recognized as income.

My observation:

It is amply clear that the proposed changes arise on account of new Ind AS standards which necessitate the changes. The change shall be in deferred income.

2(b) Employee costs

Employee Cost shall be ascertained taking into account the gross pay including all allowances payable along with the cost to the employer of all the benefits, including the cost of retirement benefits charged in the financial statements in an accounting period. In case of companies to which Indian Accounting Standards apply, any re-measurement of such costs recognized in other comprehensive income shall not form part of the employee cost.

(i) Any Subsidy, Grant, Incentive or any such payment received or receivable with respect to any Employee cost shall be reduced for ascertainment of cost of the cost object to which such amounts are related. In case of companies to which Indian Accounting Standards apply, any such Grants recognized as deferred income shall be reduced from the employee cost in the financial year when such deferred income is recognized as income.

My observation:

It is amply clear that the proposed changes arise on account of new Ind AS standards which necessitate the correction. The change shall be in deferred income in relation to employee cost.

3(l) Utilities 

Any Subsidy or Grant or Incentive or any such payment received or receivable with respect to any cost of utilities shall be reduced for ascertainment of the cost to which such amounts are related.

 In case of companies to which Indian Accounting Standards apply, any such Grants recognized as deferred income shall be reduced from the utility cost in the financial year when such deferred income is recognized as income.

4(h) Direct expenses 

Any Subsidy or Grant or Incentive or any such payment received or receivable with respect to any Direct Expenses shall be reduced for ascertainment of the cost object to which such amounts are related.

 In case of companies to which Indian Accounting Standards apply, any such Grants recognized as deferred income shall be reduced from the direct expenses in the financial year when such deferred income is recognized as income. 

5(j) Repair and maintenance: Deleted. 

5(o) Subsidy or Grant or Incentive or amount of similar nature received or receivable with respect to repairs and maintenance activity, if any, shall be reduced for ascertainment of the cost object to which such amounts are related.

 In case of companies to which Indian Accounting Standards apply, any such Grants recognized as deferred income shall be reduced from the repair and maintenance cost in the financial year when such deferred income is recognized as income. 

Indian Accounting Standards apply, grants recognized as deferred income necessitate the change.

6(a) Fixed assets and depreciation

Proper and adequate records shall be maintained for assets used for production of goods or rendering of services under reference in respect of which depreciation/amortization has to be provided for. These records shall, inter-alia, indicate grouping of assets under each good or service, the cost of acquisition of each item of asset including installation charges, date of acquisition and rate of depreciation.

My observation

The word amortization has done the trick for the change.

6(b) The Depreciation and Amortization shall be measured as per provisions contained in Companies Act, 2013 and Rules made thereunder.

6(c, d, e, f, g, h, I, k, l, o, p, q, r): Deleted  

6(n) Impairment loss on assets shall be excluded from cost of production/service.

6(s) Spares purchased specifically for a particular asset, or class of assets, and which would become redundant if that asset or class of asset was retired or use of that asset was discontinued, shall form part of that asset. The depreciable amount of such spares shall be allocated over the useful life of the asset. In case of companies to which Indian Accounting Standards apply, Items such as spare parts, stand-by equipment and servicing equipment are recognized as property, plant and equipment when they meet the definition of property, plant and equipment and depreciated accordingly. Otherwise, such items are classified as inventory. 

6(t, u, v) 

Deleted. 

7(h) Overheads

Any subsidy or Grant or Incentive or amount of similar nature received or receivable with respect to overheads shall be reduced for ascertainment of the cost object to which such amounts are related.

 In case of companies to which Indian Accounting Standards apply, any such Grants recognized as deferred income shall be reduced from the overhead cost in the financial year when such deferred income is recognized as income. 

8(e) Administrative overheads 

Any Subsidy or Grant or Incentive or any amount of similar nature received or receivable with respect to any Administrative overheads shall be reduced for ascertainment of the cost object to which such amounts are related.

In case of companies to which Indian Accounting Standards apply, any such Grants recognized as deferred income shall be reduced from the administrative overhead cost in the financial year when such deferred income is recognized as income 

10(d) Royalty and technical knowledge 

Any Subsidy or Grant or Incentive or any such payment received or receivable with respect to amount of Royalty and Technical Know-how fee shall be reduced to measure the amount of royalty and technical know- how fee.

In case of companies to which Indian Accounting Standards apply, any such Grants recognized as deferred income shall be reduced from the royalty and technical know-how fee in the financial year when such deferred income is recognized as income 

11(b) Research and Development expenses

Subsidy or Grant or Incentive or amount of similar nature received or receivable with respect to Research and Development Activity, if any, shall be reduced from the cost of such Research and Development Activity.

 In case of companies to which Indian Accounting Standards apply, any such Grants recognized as deferred income shall be reduced from the research and development cost in the financial year when such deferred income is recognized as income. 

12(g) Quality control expenses 

Any Subsidy or Grant or Incentive or any such payment received or receivable with respect to any Quality Control cost shall be reduced for ascertainment of the cost object to which such amounts are related.

 In case of companies to which Indian Accounting Standards apply, any such Grants recognized as deferred income shall be reduced from the quality control cost in the financial year when such deferred income is recognized as income. 

13(p) Pollution control expenses 

Subsidy or Grant or Incentive or amount of similar nature received or receivable with respect to Pollution Control activity, if any, shall be reduced for ascertainment of the cost of the cost object to which such amounts are related.

 In case of companies to which Indian Accounting Standards apply, any such Grants recognized as deferred income shall be reduced from the pollution control cost in the financial year when such deferred income is recognized as income. 

14(n) Service department expenses 

Any Subsidy or Grant or Incentive or any such payment received or receivable with respect to any service cost center shall be reduced for ascertainment of the cost to which such amounts are related.

 In case of companies to which Indian Accounting Standards apply, any such Grants recognized as deferred income shall be reduced from the service department cost in the financial year when such deferred income is recognized as income. 

15(h) Packing expenses

Any Subsidy or Grant or Incentive or any such payment received or receivable with respect to packing material shall be reduced for ascertainment of the cost to which such amounts are related.

 In case of companies to which Indian Accounting Standards apply, any such Grants recognized as deferred income shall be reduced from the packing material cost in the financial year when such deferred income is recognized as income 

16(a) Interest and Financing charges 

Interest and Financing Charges are interest and other costs incurred by an entity in connection with the financing arrangements which shall be measured in accordance with the provisions contained in Companies Act, 2013 and Rules made thereunder.

16(e) Subsidy or Grant 

Subsidy or Grant or Incentive or amount of similar nature received or receivable with respect to Interest and Financing Charges, if any, shall be reduced to ascertain the net interest and financing charges.

 In case of companies to which Indian Accounting Standards apply, any such Grants recognized as deferred income shall be reduced from the interest and financing cost in the financial year when such deferred income is recognized as income.

18(a) Capacity determination 

Capacity shall be determined in terms of units of production or services or equivalent machine or man hours.

21(b) Bye-products and Joint products  

The cost up to the point of separation of products or services shall be apportioned to joint products or services on reasonable and equitable basis and shall be applied consistently. The basis on which such joint costs are apportioned to different products or services arising from the process shall be indicated in the cost records. Proper records shall be maintained in respect of credits or recoveries from the disposal of joint products or services. 

Form CRA-3 [Pursuant to Rule 6(4) of the Companies (Cost Records and Audit) Rules, 2014]

 FORM OF THE COST AUDIT REPORT

 Annexure to the Cost Audit Report– Part A  

This form gets thorough change due to new Indian Accounting Standards and requires expert study by auditors who are conversant with the cost audit requirements. Hence detailed discussion has not been done.

Part B is for the manufacturing sector with detailed quantitative information.

Part C proudly proclaims its allegiance to Service sector with resultant information for filling up.

Part D is for product and service profitability statement (for audited products and services). 

Conclusion 

This article is an attempt by the undersigned to draw a mere sketch of the new changes indicated by Ministry of Corporate Affairs, Government of India vide its communication dated 11th August 2017 which contained draft rules for 2017 as well as notice issued in this regard. Unashamedly, I agree that an expert Cost Account Auditor can easily explain the costing nuances in a better manner and also with more details. But computerization along with attendant shortage of time and increased productivity have made the task very difficult. Still, I request many brilliant cost auditors to give us more information, when the rules are officially notified for implementation. Right now, it has just crossed the suggestions receiving level for formal approval and gazette notification for final implementation.  

Reference

Draft Companies (cost records and audit) Amendment Rules, 2017

Summary of changes as per Draft Companies (Cost Records and Audit) Amendment Rules, 2017

Both these web sites are treasure house for qualified Cost Auditors and I request them to write more detailed note for our knowledge in near future.

 

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