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Companies (Cost Records and Audit) Amendment Rules, 2017- Implications: CMA Arun Karnik

 

Backdrop:

The Ministry of Corporate Affairs (MCA) has on December 7, 2017 notified amendments to the Companies (Cost Records and Audit) Rules, 2017. This amendment has been brought about mainly with the  objective of bringing cost records and audit in sync with the Indian Accounting Standards (IndAS).

Two interesting observations in connection with the Amendment Rules. One, the principles of IndAS are to be observed by all companies that are subject to cost audit irrespective of the fact  whether a company is required to follow the IndAS under the Companies Act, 2013. Secondly, and more important, the Amendment Rules issued on December 7, 2017 are applicable retrospectively from April 1, 2016. In other words, adoption to the IndAS to cost records and cost audit is expected even for the financial year ended on March 31, 2017. As a matter of fact, the deadline for submission of the Cost Audit Report by companies for the year 2016-17 being October 27, 2017, companies are supposed to have observed the Rules as the stood prior to issue of the Amendment Rules of 2017 which were announced only on December 7, 2017. Logically, therefore, it seems that the MCA will not insist on observance of the Amendment Rules, 2017 for the financial year 2016-17.

Implications of the Amendment Rules, 2017:

The Notification of December 7, 2017 has revised the  Annexures,  CRA-1 (Particulars relating to the items of Costs to be included in the Books of Accounts)  and Form CRA-3 (Form of the Cost Audit ReportMmm

Clause wise changes brought about by the amendment rules is as follows. The clauses as amended have been printed in italics, followed by the implication of the amendment.

CRA 1

  1. Material Cost:
  2. Rule (e) 2017:

(e,) Spare parts shall be recognised as property, plant and equipment when they meet the definition of property, plant and equipment and depreciated accordingly. Otherwise, such items shall be classified as inventory.

                    Implication– If spare parts are in the nature of independent equipment, these

are to be treated as plant and equipment and ‘depreciated’ at the appropriate rate.

Other spares are to be treated as ‘Inventory’ items and to be charged to Profit and

Loss statement upon issue for use.

  1. Rule (j) 2017:

(j) Subsidy or grant or incentive and any such payment received or receivable with respect to any material cost shall be reduced from cost of the cost object in the financial year when such subsidy or grant or incentive and any such payment is recognized as income.

Implication- In case any subsidies are available on any material, the reduction in thr material cost on account of such subsidy is to be given effect to in the year in which such subsidy is accounted in financial accounts.

  • Rule (k) 2017:

(k) lssues shall be valued using appropriate method as per the provisions contained in the accounting standard applicable for the time being in force.

Implication- Material issues are to be valued as per the provisions contained in the IndAs. Earlier, the Company could choose the method, viz. FIFO, LIFO, etc. It was acceptable as long as the same method is followed consistently.

  1. Employee Costs:
  2. Rule (b):

(b,) 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.

 

          Implication- Clarifies that the cost of retirement benefits is to form part of

          employee costs. However, it is clarified that  if a company has in a given

financial year incurred any additional expense as a result  of re-

measurement of such retirement benefit costs, such additional cost

will not form part of employee cost, even where such additional expense is

debited in the financial statements for the year.

  1. Rule (i)

Subsidy or grant or incentive and any such payment received or receivable with respect to any employee cost shall be reduced from cost of the cost object in the financial year when such subsidy or grant or incentive and any such payment is recognized as income.

 

Implication- If the company is entitled to claim any grant, subsidy or incentive on the employee costs, such grant, subsidy or incentive is to be considered only in the financial year in which such grant, etc. is recognized as income in the financial statements. The value of such grant is to be reduced from the cost of the cost object concerned.

  1. Utility Costs:
  2. Rule (l)

               Subsidy or grant or incentive and any such payment received or receivable with

               respect to any cost of utilities shall be reduced from cost of the cost object in

              the financial year when such subsidy or grant or incentive and any such payment

              is recognized as income.

 

 Implication-  If the company is entitled to claim any grant, subsidy or incentive on any component of utility costs, such grant, subsidy or incentive is to be considered only in the financial year in which such grant, etc. is recognized as income in the financial statements. The value of such grant is to be reduced from the cost of the cost object concerned.

 

  1. Direct Expenses:
  2. Rule (h)

Subsidy or grant or incentive and any such payment received or receivable with respect to any direct expenses shall be reduced from cost of the cost object in the financial year when such subsidy or grant or incentive and any such payment is recognized as income.

 

Implication- If the company is entitled to claim any grant, subsidy or incentive on any component of Direct Expense costs, such grant, subsidy or incentive is to be considered only in the financial year in which such grant, etc. is recognized as income in the financial statements. The value of such grant is to be reduced from the cost of the cost object concerned.

 

  1. Repair and Maintenance Cost:
  2. Rule (n)

Subsidy or grant or incentive and any such payment received or receivable with respect to repairs and maintenance activity shall be reduced from cost of the cost object in the financial year when such subsidy or grant or incentive and any such payment is recognized as income.

 

Implication- If the company is entitled to claim any grant, subsidy or incentive on any component of Repair costs, such grant, subsidy or incentive is to be considered only in the financial year in which such grant, etc. is recognized as income in the financial statements. The value of such grant is to be reduced from the cost of the cost object concerned.

 

  1. Fixed Assets and Depreciation:

            Rule (b)

             The depreciation and amortisation shall be the amount recognised as an expense

             for the year in the financial statements, which shall be measured as per the

             provisions contained in Schedule ll of the Companies Act, 2013 and the

             accounting standards applicable for the time being in force. The amount of

             Depreciation and Amortisation not recognised as expense in the financial

             statements shall be treated as a non-cost item.

 

             Implication- The depreciation/amortization to be applied to cost objects has to

             be as per the depreciation expense as recognized in the financial

statements.(Earlier, the computation of depreciation and amortization expense

for cost records purposes culd differ from the expense figure as disclosed in the

financial statements. However, the depreciation used for cost accounting could

not be lower than the expense charged in the financial statements.)

 

            Rule (c)

            Depreciation on an asset which is temporarily retired from production of goods

            and services shall be considered as abnormal cost for the period when the asset is

            not in use.

 

            Implication-This provision in the new Rules is in line with the generally accepted

cost accounting principles.

 

            Rule (d)

           Impairment loss on assets shall be excluded from cost of production/service. 

 

          Implication– This provision is in line with the generally accepted cost accounting

principles.

 

Rule (e)

      Spare parts, stand-by equipment and servicing equipment shall be recognised as

      property, plant and equipment when they meet the definition of property, plant and

      equipment and depreciated accordingly. Otherwise, such items shall be classified as

      inventory.

 

     Implication– It is necessary to determine whether spares or stand-by equipment falls

within the meaning of ‘property, plant and equipment’. If an item qualifies to be

termed ‘property, plant and equipment’, depreciation will have to be computed on

such item. Otherwise, such spare parts and equipment will be classified as

‘inventory’ and depreciation will not be provided.

 

  1. Overheads:
  2. Rule (h)

Subsidy or grant or incentive and any such payment received or receivable with respect to overheads shall be reduced from cost of the cost object in the financial year when such subsidy or grant or incentive and any such payment is recognised as income.

 

Implication- If the company is entitled to claim any grant, subsidy or incentive on any component of overhead expense, such grant, subsidy or incentive is to be considered only in the financial year in which such grant, etc. is recognized as income in the financial statements. The value of such grant is to be reduced from the cost of the cost object concerned.

 

  1. Administrative Overheads:
  2. Rule (e)

Subsidy or grant or incentive and any such payment received or receivable with respect to any administrative overheads shall be reduced from cost of the cost object in the financial year  financial year when such subsidy or grant or incentive and any such payment is recognised as income.

 

Implication- If the company is entitled to claim any grant, subsidy or incentive on any component of Administrative expense, such grant, subsidy or incentive is to be considered only in the financial year in which such grant, etc. is recognized as

income in the financial statements. The value of such grant is to be reduced from the cost of the cost objects concerned.

 

  1. Royalty and Technical knowhow:
  2. Rule (d)

Subsidy or grant or incentive and any such payment received or receivable with respect to amount of royalty and technical know-how fee shall be reduced from cost of the cost object in the financial year when such subsidy or grant or incentive and any such payment is recognized as income.

 

Implication- If the company is entitled to claim any grant, subsidy or incentive on any Royalty or Technical knowhow expense, such grant, subsidy or incentive is to be considered only in the financial year in which such grant, etc. is recognized as

income in the financial statements. The value of such grant is to be reduced from the cost of the cost objects concerned.

 

  1. Research and Development Expenses:
  2. Rule (b)

Subsidy or grant or incentive and any such payment received or receivable with respect to research and development activity shall be reduced from cost of the cost object in the financial year when such subsidy or grant or incentive and any such payment is recognised as income.

 

Implication- If the company is entitled to claim any grant, subsidy or incentive on any component of research and development expense, such grant, subsidy or incentive is to be considered only in the financial year in which such grant, etc. is recognized as income in the financial statements. The value of such grant is to be reduced from the cost of the cost objects concerned.

 

  1. Quality Control Costs:
  2. Rule (g)

Subsidy or grant or incentive and any such payment received or receivable with respect to any quality control cost shall be reduced from cost of the cost object in the financial year when such subsidy or grant or incentive and any such payment is recognized as income.

 

Implication- If the company is entitled to claim any grant, subsidy or incentive on any component of quality control expense, such grant, subsidy or incentive is to be considered only in the financial year in which such grant, etc. is recognized as income in the financial statements. The value of such grant is to be reduced from the cost of the cost objects concerned.

 

  1. Pollution Control Expenses:
  2. Rule (p)

Subsidy or grant or incentive and any such payment received or receivable with respect to pollution control activity shall be reduced from cost of the cost object in the financial year when such subsidy or grant or incentive and any such payment is recognized as income.

 

Implication- If the company is entitled to claim any grant, subsidy or incentive on any component of pollution control expense, such grant, subsidy or incentive is to be considered only in the financial year in which such grant, etc. is recognized as income in the financial statements. The value of such grant is to be reduced from the cost of the cost objects concerned.

 

  1. Service Department Expenses:
  2. Rule (n)

Subsidy or grant or incentive and any such payment received or receivable with respect to any service cost centre shall be reduced from cost of the cost object in the financial year when such subsidy or grant or incentive and any such payment is recognised as income.

 

Implication- If the company is entitled to claim any grant, subsidy or incentive on any component of service department expense, such grant, subsidy or incentive is to be considered only in the financial year in which such grant, etc. is recognized as income in the financial statements. The value of such grant is to be reduced from the cost of the cost objects concerned.

 

  1. Packing Expenses:
  2. Rule (h)

Subsidy or grant or incentive and any such payment received or receivable with respect to packing material shall be reduced from cost of the cost object in the financial year when such subsidy or grant or incentive and any such payment is recognised as income.

 

Implication- If the company is entitled to claim any grant, subsidy or incentive on any component of packing expenses, such grant, subsidy or incentive is to be considered only in the financial year in which such grant, etc. is recognized as income in the financial statements. The value of such grant is to be reduced from the cost of the cost objects concerned.

 

  1. Rule (i)

lssue of packing materials shall be valued using appropriate method as per the provisions contained in the accounting standard applicable for the time being in force.

                           Implication- Material issues are to be valued as per the provisions contained in

the IndAs. Earlier, the Company could choose the method, viz. FIFO, LIFO, etc. It

was acceptable as long as the same method is followed consistently.

 

 

 

 

  1. Finance Costs:
  2. Rule (a)

Finance costs are interest and other costs incurred by an entity in connection with the financing arrangements and shall be measured in accordance with the accounting standards applicable for the time being in force.

 

Implications- The revised Rules specifically stipulate that finance costs are to be measured in accordance with the IndAs provisions.

 

  1. Rule (e)

Subsidy or grant or incentive and any such payment received or receivable with respect to finance costs shall be reduced from cost of the cost object in the

financial year when such subsidy or grant or incentive and any such payment is recognized as income.

 

Implication- If the company is entitled to claim any grant, subsidy or incentive on any component of finance charges, such grant, subsidy or incentive is to be considered only in the financial year in which such grant, etc. is recognized as income in the financial statements. The value of such grant is to be reduced from the cost of the cost objects concerned.

 

CRA 3

 

Annexure to the Cost Audit Report

 Part-A:

  1. General Information-
  2. Against entry no. 11, it is now necessary to mention whether lndiAS  applicable to the company.
  3. Products/Services Details (for the company as a whole)-
  4. Reconciliation of turnover- the wordings should have been excise, service tax or Goods and Services Tx, as the case may be.

 

                            Part- B For Manufacturing sector:

 

  1. Quantitative information- item 3- the wording should have been . Production as per Excise/ GST

 

 

 

 

 Part D:

  1. Profit Reconciliation (for company as a whole):
  2. The Profit or Loss as per Financial Accounts is to be shown ’excluding Other Comprehensive Income for companies following Ind AS’.
  3. Financial Position and Ratio Analysis (for the company as a whole):
  4. Share Capital- In this table, in case of companies to which IndAS apply Share Capital shall mean ‘Equity Share Capital’. Thus, share capital other than equity share capital is not to be shown against the head ‘Share Capital’.
  5. Reserves and Surplus- , in case of companies to which IndAS apply, reserves and Surplus shall include ‘Other Equity’.
  6. Long term borrowing- , in case of companies to which IndAS apply Long Term Borrowing will include ‘Borrowing under Non-Current Liabilities’.
  7. Net Fixed Assets- in case of companies to which IndAS apply Net Fixed Assets shall mean the sum total of ‘Property, Plant and Equipment’, ‘Capital Work in Progress’, ‘Goodwil’, ‘Other intangible assets’, ‘intangible assets under

 

  1. Reconciliation of Indirect Taxes (for the Company as a whole):

The  prescribed format of reconciliation of indirect taxes needs to be revised in view of switchover to the GST regime.

 

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