A presentation by KUNAL BANERJEE Past President, ICWAI Cochin, July 17, 2011

 Lack of standardized approach of collection, measurement and reporting of cost  Development of Cost & Management Accounting System in most companies - more by hindsight rather than on foresight  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.

 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

 Section 209(1)(d) applicable to companies engaged in Production, Processing, Manufacturing and Mining activities.  Central Government notified Cost Accounting Record Rules for 44 industries/products.  These Rules apply to all companies except SSI Units with investment of Rs.3 crores and turnover up to Rs.10 crores.  Cost audit conducted under section 233B  Single Separate Cost Audit Report Rules  Government so far ordered Cost Audit in about 2500 cases.  In many multi-product companies - multiple Rules, multiple cost audit orders, and appointment of multiple cost auditors.  Companies required to submit product-wise and unit-wise multiple cost audit reports; size of each report is voluminous.

‣ Selective, Ad hoc and Pick & Choose approach ‣ Led to a sense of discrimination amongst companies ‣ No orders in majority of Multinational, Foreign and Private companies ‣ Companies to comply with too many Rules ‣ Fixed Formats for record keeping - lacked flexibility with companies ‣ Companies required to submit multiple & complex cost audit reports for each unit & each product separately ‣ Multiple appointment of cost auditors ‣ Existing size of each report is between pages. ‣ Selective coverage did not give full advantage either to the Government or to the Regulatory Bodies

 Government of India, Ministry of Corporate Affairs constituted an Expert Group, in January 2008, with members drawn from MCA, major Industry Associations, and Professional Bodies, to: enable development of relevant cost accounting methodologies and standards; increase competitiveness of the Indian manufacturing sector; and to advise the Government on suitable measures for the same.  The Group co-opted/associated large number of eminent experts representing different stakeholders.  The Group also had detailed deliberations with large number of Public Sector and Private Sector companies and considered their views/suggestions.  The Group submitted its Report in December,  MCA put this report on its website in March 2009.

 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; Suggested Performance Appraisal Report for Board Suggested Uniform Rules Suggested simplified Report Structure  Linkage of cost data to the national objectives, viz., Corporate Governance, Competitiveness and Regulatory Framework;  Introducing cost accounting standards as a principle based assurance mechanism; and  Enabling Government to play an effective Regulatory role in the corporate functioning.

 Companies Act 1956 – existing provisions of Section 209(1)(d) and Section 233B  Proposals for the Companies Bill 2009 and possible enactment of new provisions are outside the purview of the discussion

 16/12/2010 – Cost Audit Orders on 115 new companies based on requirement of Regulators  11/04/2011 – Revised Procedure for appointment of Cost Auditors  02/05/2011 – Cost Audit Order on every company having turnover of Rs. 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 Rs.100 crores or more and other criteria engaged in Cement, Tyres & Tubes, Steel Plants, Steel Tubes, Insecticides and Paper

 03/06/ Companies (Cost Accounting Records) Rules 2011 under Section 209(1)(d) of the Companies Act 1956  03/06/ Companies (Cost Audit Report) Rules 2011 under Section 233B(4) and Section 227(1) of the Companies Act 1956  30/06/2011 – Cost Audit Orders in modification of 3 rd May 2011 order – specifying product/activity as defined under Central Excise Tariff Act

 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 Rs. 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 Rs. 20 crores, or  the company’s equity or debt securities are listed or are in the process of listing on any stock exchange

 Not applicable to Company which is a body corporate under a special Act  Supersedes 36 Cost Accounting Records out of 44 issued till date  Does not apply to activities or products covered under Cost Accounting Records for: Bulk DrugsIndustrial Alcohol FormulationsElectricity Industry FertilizersPetroleum Industry SugarTelecommunications

 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 ICWAI  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.

 Every person, referred to in sub-section (6) and (7) of section 209 of the Companies Act, 1956  Persons to take all reasonable steps to secure compliance by the company with the provisions of these rules  To maintain accounts in the same manner as required under sub-section (1) of section 209 of the said Act

 Every company to which these rules apply shall submit a Compliance Report  From by every company for financial year commencing from 01/04/2011  Required to be filed irrespective of whether any or 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

 Revised Cost Audit Report Rules issued superseding Cost Audit Report Rules  Come into force from June 3, 2011 after publication in the Official Gazette  Applies to every company in respect of which cost audit has been ordered by the Central Government under Section 233B of the Companies Act, 1956

 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

 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  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 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

 The Annexure prescribed with the cost audit report shall be approved by the Board of Directors before submitting the same to the Central Government by the cost auditor.  The Annexure, duly audited by the cost auditor, shall also be signed by the Company Secretary and at least one Director on behalf of the company.  In the absence of Company Secretary in the company, the same shall be signed by at least two Directors.

 No specific formats prescribed under the Rules for the cost statements.  cost records are to be maintained in accordance with the generally accepted cost accounting principles and cost accounting standards issued by the ICWAI to the extent these are found to be relevant and applicable  A guidance note on the subject is under preparation by ICWAI, inter alia, containing model formats for cost records, statements, schedules etc.

Who is a cost accountant  “cost accountant” is a person as defined under Rule 2(c)  It does not include:  A member holding a part-time certificate of practice; or  A member who is in full time employment whose membership fees are in arrears;  A member of ICWAI who has been admitted as a member through reciprocal arrangement of membership by virtue of being a member of Institute of Management Accountants USA.

 Companies engaged in eight (8) products/activities have been excluded from the purview of CARR  Companies engaged in such activities or products to which any of the 8 CARRs apply will not be required to file a Compliance Report until these Rules are amended  If the concerned company is also engaged in other activities covered under CARR 2011, the company would be required to file a Compliance Report

 There is no ceiling on the number of Compliance Reports that can be authenticated by a cost accountant in whole-time practice.  A cost accountant working as permanent employee can authenticate the Compliance Report of the company where he is employed provided his membership dues are not in arrears.

 A Cost Accountant  who is working as permanent employee of a company and responsible for maintenance of cost records can also authenticate Compliance Report of the company  who has been appointed as cost auditor of the company can also authenticate the Compliance Report of that company

Cost records are:  Books of account and other records relating to utilization of materials, labour and other items of cost  provides data/information to compute the cost of production, cost of sales and margin of each of the products/activities of the company  includes statistical, quantitative and other records  No exhaustive list of cost records  depend on the materiality of cost components in the cost of the product/activity  Cost records are required to be maintained on continuous basis from the basic stage of inputs to the final output

 Every company covered under Companies (Cost Accounting Records) Rules 2011 is required to file a Compliance Report.  Filing of Compliance Report is irrespective of whether all or any of its products are covered under cost audit.  The Compliance Report shall include product groups covered under cost audit as well as product groups not covered under cost audit  For every company, Compliance Report is to be prepared for the ‘company as a whole’ under different product groups

 The status of a company engaged in multiple product range will remain unchanged regarding cost audit if some of its products are under cost audit.  The company would now be required to maintain cost records for all the products/activities irrespective of whether these are under cost audit or not and also file a Compliance Report