Cost Accounting Records & Audit Rules – A Technical Overview

1. Cost Accounting Records &Audit Rules – A Technical Overview Presentation By CMA ARUNAVA CHAKRABORTYChakraborty Kapoor & Co. Cost AccountantsF-1210, C R Park, New Delhi – 110019 Phone: +91 11 26275907, Email: info@cmackc.com Sponsors: Matrix Office Outsourcing Private Limited Chakraborty Kapoor & Co. 2012

2. Introduction The Aim of this presentation is to understand the basic concept of Cost Accounting in the following Context: • Why do we need a new system when we have FA. • Aims of the Current Systems • Who are the stakeholders affected by the system • Steps taken by MCA for implementation • Discussion on The Cost Accounting Records Rules and its salient features • Salient features of Cost Audit Report Rules • Duty of the Company and Duty of the Cost Auditor. • What is to be done to be compliant. • Risks for non compliance and Penalties • CARR vis-a-vis Central Excise • CARR vis-a-vis Financial Accounting and Statutory Audit Chakraborty Kapoor & Co. 2012

3. Status of Cost & Management Accounting in India • No standard approach of collection, measurement and reporting of cost • Development of Cost & Management Accounting System in most companies - more by firefighting rather than on future planning • Low level of awareness • on latest cost & management accounting tools • on the impending ramifications of WTO and IFRS • No mechanism to disclose key cost management trends to stakeholders. (Pakistan has mandated disclosure of Cost Audit Report in Public domain) • IFAC Survey – IFRS based financial reporting satisfies the compliance requirements but falls short of a Performance Based Reporting for improved Board Governance Proposed structure of reporting to improve performance, oversight mechanism and governance at Board level. Chakraborty Kapoor & Co. 2012

4. ‘International Good Practice Guideline’ by IFAC[July 2009] • Costing for decision support is valuable for performance improvement, value creation, “what if” analysis, and the effective and efficient application of an enterprise’s resources and processes • Suggests six key principles underlying good practice in evaluating and improving costing in organizations, external reporting and providing assurance to stakeholders • Recognizes traceability and assurance of costs as a good practice • Cost audit and assurance mechanism prevalent in certain jurisdictions is used for: • Tax Optimization • Dealing with Transfer Pricing Matters • Valuation of Inventories • Segmental Reporting • For pricing in Rate Regulated Entities Chakraborty Kapoor & Co. 2012

5. Who are the stake holders A stakeholder is any person or entity that has an interest in the success or failure of a business or project. • Shareholders • Management • Creditors • Bankers • Employees • Government • Local Community Chakraborty Kapoor & Co. 2012

6. LimitationsofFinancialAccounting • No operating details of particular departments • Does not ensure control over material use; does not help in wastage avoidance • Costs are not assigned to products, departments, divisions, etc. • No standards for comparison • Loss is not analyzed taking idle time, defective material, etc. • Does not help in pricing decisions • No information for managerial decisions such as shut down or continue, deciding about product-mix, buy or manufacture, etc. Chakraborty Kapoor & Co. 2012

7. What does the current system Aim to Achieve • Simplification of existing rules, procedures and formats; • Making attested cost data more relevant to the needs of different stakeholders including company management, shareholders, regulators etc.: • Implement Performance Appraisal Report for Board • Implement Uniform Rules • Implement simplified Report Structure • Linkage of cost data to the national objectives, viz., Corporate Governance, Competitiveness and Regulatory Framework (XBRL) • Introducing cost accounting standards as a principle based assurance mechanism; and • Enabling Government to play an effective Regulatory role in the corporate functioning. Chakraborty Kapoor & Co. 2012

8. Steps by MCA - Road to implementation. A Special Task Force was constituted in 2008 by GOI to bring out the changes that we see today in the form of Notifications Starting April 2011 • 11/04/2011– Revised Procedure for appointment of Cost Auditors • 02/05/2011 – Cost Audit Order on every company having turnover of ` 20 crores or more and other criteria engaged in Bulk Drugs, Formulations, Fertilizer, Sugar, Industrial Alcohol, Electricity, Petroleum, Telecommunications • 03/05/2011 – Cost Audit Orders on every company having turnover of ` 100 crores or more and other criteria engaged in Cement, Tires & Tubes, Steel Plants, Steel Tubes, Insecticides and Paper (Superseded by Notification dated 30th June 2011) • 03/06/2011 - Companies (Cost Accounting Records) Rules 2011 under Section 209(1)(d) of the Companies Act 1956 • 03/06/2011 - Companies (Cost Audit Report) Rules 2011 under Section 233B(4) and Section 227(1) of the Companies Act 1956 Chakraborty Kapoor & Co. 2012

9. Steps by MCA - Road to implementation. • 30/06/2011 – Cost Audit Orders in modification of 3rd May 2011 order – specifying product/activity as defined under Central Excise Tariff Act, 1985 • 30/11/2012 – Clarifications issued by the MCA on certain sectors exempt from Cost Accounting Records Rules or Cost Audit. • 07/12/2011 – Cost Accounting Records Rules for the regulated 8 industries specified. • 24/01/2012 –Cost Audit Orders adding 8 additional industries under 12 Chapters of Central Excise Tariff Act, 1985 • 25/5/2012 – Exemption of Cost Audit for units located in specified zones such as Special Economic Zones (SEZs), Export Processing Zones (EPSs) and Free Trade Zones (FTZs) and also 100% EOU. But filing of cost compliance not exempted. • 25/5/2012 – Clarification on inclusion of Construction industry under Cost Accounting Record Rules and Cost Audit Chakraborty Kapoor & Co. 2012

10. Companies (Cost Accounting Records) Rules 2011 • Applicable to every company including a foreign company engaged in production, processing, manufacturing or mining wherein: • the aggregate value of net worth as on the last date of the immediately preceding financial year exceeds ` 5 crores, or • the aggregate value of the turnover made by the company from all products or activities during the immediately preceding financial year exceeds ` 20 crores, or • the company’s equity or debt securities are listed or are in the process of listing on any stock exchange Chakraborty Kapoor & Co. 2012

11. Salient Features of Cost Accounting Records Rules 2011 • Cost records to be maintained: • On regular basis to determine cost of production, sales and margin of each product • In accordance with generally accepted cost accounting principles and cost accounting standards issued by ICAI • To be reconciled with audited financial accounts • Expenses or incomes not considered in the cost records to be indicated to reconcile the profit of all product groups with the overall profit of the company. • Records to be maintained for 8 years from the year to which it starts applicable. • Not applicable to Company which is a body corporate under a special Act • Supersedes 36 Cost Accounting Records out of 44 issued till date Chakraborty Kapoor & Co. 2012

12. Salient Features of Cost Accounting Records Rules 2011 • All units located in specified zones such as Special Economic Zones (SEZs), Export Processing Zones (EPSs) and Free Trade Zones (FTZs) and also 100% Export Oriented Units (EOUs) are exempted from Cost Audit but no exemption from maintenance of Cost records and filing of Cost Compliance Report. • The following activities are covered under separate individual rules for cost accounting records and Cost Audit as notified on 7th December 2011. Chakraborty Kapoor & Co. 2012

13. Salient Features of Companies (Cost Audit Report) Rules 2011 • Applicable to every company including a foreign company engaged in production, processing, manufacturing or mining wherein: • they are engaged in tariff heads as defined under notification dated 30th June 2011 and 24th January 2012 and the aggregate value of the turnover made by the company from all products or activities during the immediately preceding financial year exceeds ` 100 crores • They are engaged in activities where special Cost Audit Records Rules Apply under six categories and where: • the aggregate value of the turnover made by the company from all products or activities during the immediately preceding financial year exceeds ` 20 crores or • the aggregate value of net worth as on the last date of the immediately preceding financial year exceeds ` 5 crores, or the company’s equity or • debt securities are listed or are in the process of listing on any stock exchange Chakraborty Kapoor & Co. 2012

14. Salient Features of Companies (Cost Audit Report) Rules 2011 • Cost Audit Applies to the following industries Chakraborty Kapoor & Co. 2012

15. Salient Features of Companies (Cost Audit Report) Rules 2011 • Every company under cost audit to file within 90 days of the commencement of every financial year, application in Form 23C with the Central Government seeking prior approval for appointment of the Cost Auditor • Application to be filed through electronic mode, in the prescribed form, along with the prescribed fee • Company to issue appointment letter to cost auditor after receipt of approval. • Cost auditor to file Form 23D after appointment letter is received • As per General Circular No. 15/2011 of MCA dated April 11, 2011 approval would be deemed to have been granted unless any query is raised by Government within 30 days of filing. • Cost audit report submitted on or after 1st day of April, 2012 irrespective of the financial year of the company to which it relates, shall be in the form prescribed under these rules Chakraborty Kapoor & Co. 2012

16. Cost Audit Report Structure • FORM-I - Form for filing Cost Audit Report and other documents with the Central Government • FORM-II - Form of the Cost Audit Report • Annexure to the Cost Audit Report • General Information • Cost Accounting Policy • Product Group Details (For The Company As A Whole) • Quantitative Information (For Each Product Group Separately) • Abridged Cost Statement (For Each Product Group Separately) • Operating Ratio Analysis (For Each Product Group Separately) • Profit Reconciliation (For The Company As A Whole) • Value Addition And Distribution Of Earnings (For The Company As A Whole) • Financial Position And Ratio Analysis (For The Company As A Whole) • Related Party Transactions (For The Company As A Whole) • Reconciliation Of Indirect Taxes (For The Company As A Whole) • FORM-III - Form of the Performance Appraisal Report Chakraborty Kapoor & Co. 2012

17. CARR and CAR not applicable • Companies ( Cost Accounting Records ) Rules, 2011 not applicable to • Wholesale or Retail Trading activities • Banking, financial, leasing, investment, Insurance…..etc. • Companies engaged in Job work – paid only for job work …etc. • Companies … till commences commercial production • Ancillary products / activities .. Less than 2% or `20 crores • Cost Audit Orders not applicable to • Captive Generating Plant • 100% Captive Consumption • 100% EOU • Intermediate Products - defined Chakraborty Kapoor & Co. 2012

18. Duties of the Company • Every company under cost audit: • to keep and maintain cost details, statements, schedules, etc. • for each unit and • each product or activity comprised in each product group, • duly authenticated by at least two Directors of the company and the cost auditor • To ensure records adhere to the Standards as layed down by the Cost Accounting Standards Board (CASB) namely CAS1 through CAS13 • records to be kept relating to a period of not less than eight financial years immediately preceding a financial year from the date to which it starts applicable • Every company to which these rules apply shall submit a Compliance Report • From 2011-12 by every company for financial year commencing from 01/04/2011 • Required to be filed irrespective of whether some of the products are under Cost Audit. Not required if all products are under Cost Audit. • To be filed within 180 days from close of financial year • Annexures to be authenticated by a “cost accountant” • Report to be approved by Board of Directors Chakraborty Kapoor & Co. 2012

19. Duties of the Cost Auditor • Every cost auditor shall: • submit the report along with auditor's observations and suggestions, and Annexure to the Central Government in the prescribed form within 180 days from close of financial year. • furnish performance appraisal report to the Board/Audit Committee of the company in the prescribed form • give clarifications, if any, required by the Central Government on the cost audit report submitted by him, within thirty days of the receipt of the communication addressed to him calling for such clarifications Chakraborty Kapoor & Co. 2012

20. What to do? • Check with the given conditions whether any of your products fall under either Cost Compliance or Cost Audit. (this can be done from the Excise Tariff headings of your products) • In case you have a costing system in place get it evaluated by a Cost Accountant to check whether it is following the applicable Cost Accounting Standard published by Ministry of Company Affairs (MCA). • In case any ERP is used get your ERP standardized cost allocation evaluated by a Cost Accountant to check whether it is following the applicable Cost Accounting Standard published by Ministry of Company Affairs (MCA). Chakraborty Kapoor & Co. 2012

21. What to do?....Contd..2 • In case your current system or ERP is not in line with the published Cost Accounting Standards get them aligned or reprogramed to satisfy the requirements of the Cost Accounting Standards. In case current system cannot be changed a parallel system need to be created or maintained. • In case no Cost Records or System exist, Install a Costing System which should be designed as per Cost Accounting standards and requirements of the Management so that the system can be used for efficient day to day management of the organisation • Where Cost Audit is Applicable , appoint an Auditor, a firm of Cost Accountants or a Cost Accountant having a valid certificate of practice by filing Form 23C with in due date (29th June) Chakraborty Kapoor & Co. 2012

22. What to do?....Contd..3 • Where filing of Compliance Certificate of Cost Record is applicable, same can be certified by a Cost Accountant employed by the Company who is a member of the Institute of Cost Accountants of India or a Practicing Cost Accountant having a valid certificate of practice. It is to be noted that a cost accountant employed by one company cannot certify the Records of another Company even if the Company is a Group Company or under the Same Management. • Once the records are generated and Audit /Compliance reports are compiled the Management before certifying such report must check that the values arrived are in line with the other figures and declarations given to the Service Tax, Sales Tax, Central Excise and Financial Records (discussed later) Chakraborty Kapoor & Co. 2012

23. Risks of non Compliance. • Every Cost Compliance Report and Cost Audit Report Needs to be Signed by the Directors before same is signed by the Cost Accountant. • Penalties for not maintaining Cost records and Audit : • If default is made by the cost accountant in complying with the provisions of these rules, he shall be punishable with fine, which may extend to five thousand rupees. • If a company contravenes any provisions of these rules, the company and every officer thereof who is in default, including the persons referred to in sub-section (6) of section 209 of the Act, shall be punishable as provided under sub-section (2) of section 642 read with sub-sections (5) and (7) of section 209 of Companies Act, 1956 (1 of 1956). • Penalties as defined u/s 642 of Companies act applying daily penalty of ` 500 applicable • Exposure of co-lateral risk from other stakeholders in the Government like Income Tax, Central Excise, etc. • All Reports and Audits are subject to review by Quality review board to ensure professionals are not used as a rubber stamp. • All reports are to be submitted in XBRL format for easy access, compilation and assessment by all Government departments. Chakraborty Kapoor & Co. 2012

24. PENALTIES UNDER Orders No. F. No. 52/26/CAB/-2010 DT. 2ND May, 2011, DT. 3RD May, 2011, 30th June, 2011 and 24th January, 2012 for Cost Audit by all Companies in 15 Groups of Industries Chakraborty Kapoor & Co. 2012

25. XBRL Instance Document Preparation Process XBRL Specification 2.1 An XML Schema that provides the rules for valid XBRL instance documents and taxonomies • Corporate Extension Taxonomies • Unique elements • Unique labels • Unique calculations • Unique references • Unique presentation • US GAAP Taxonomies • Standard elements • Standard labels • Standard calculations • Standard references • Standard presentations “tagging” Corporate Financial Facts Instance Document Doc Viewer Presentation Tools/Style Sheets Final Output Chakraborty Kapoor & Co. 2012

26. Cost Records vis-à-vis Central Excise • Special Audit by Central Excise: Management has to ensure that the financial records, excise records and the Cost records are in complete Harmony and agree to each other, specially the cost records are drawn keeping the applicable Cost Accounting Standards in mind. This needs to be kept in mind for valuation of Raw Material, Finished Goods and Work in Progress and application of CENVAT Rules. Application of the Standards may be understood from the following chart…… Chakraborty Kapoor & Co. 2012

27. Cost Records vis-à-vis Central Excise Chakraborty Kapoor & Co. 2012

28. Cost Records vis-à-vis Financial Audit • For Statutory Financial Audit conducted by Chartered Accountants/CAG: • ‘Inventories should be valued at the lower of cost and net realizable value.’ Here Accounting Standard – 2 applies. • As per AS-2 “The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.” However details to arrive such costs is missing. • Here Cost Accounting Record Rules (CARR) issued by the Ministry of Corporate affairs read with Cost 13 Accounting Standards (CAS) and Generally accepted cost accounting Principles (GACAP) will apply • The Board of Director have to provide a reconciliation statement explaining difference valuation in the financial records and Cost Records Chakraborty Kapoor & Co. 2012

29. THANKYOU Chakraborty Kapoor & Co. 2012