Clause 15 of Form No. 3CD requires reporting specific details regarding the conversion of a capital asset into stock-in-trade. This includes describing the description of the capital asset, date of acquisition, cost of acquisition, and amount at which the asset is converted into stock-in-trade.

These particulars must be provided for the previous year in which the asset was converted into stock-in-trade. It’s important to note that Clause 15 focuses solely on these details related to the conversion process and does not mandate the inclusion of information concerning the tax implications, such as capital gains or business income arising from the conversion.

In this story, we have discussed the checklist applicable to clause 15 that will assist the tax auditor in the tax audit of clause 15.

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Global Financial Insights is a weekly feature for the Accounts and Audit Module subscribers of Taxmann.com. It provides you with the latest updates on financial reporting and auditing practices from across the globe. Here is this week’s financial update.

1. PCAOB Sanctions two Public Accounting Firm for non-compliance with reporting requirements

The Public Company Accounting Oversight Board (PCAOB) has sanctioned two public accounting firm for violating PCAOB rules and standards related to reporting requirements.

1.1 Public Accounting Firm failure to furnish Form 2

PCAOB Rule 2200 requires the registered public accounting firm to file an annual report with the Board on “Form 2”. The firm should furnish all the information relating to any issuer or broker, or dealer audit reports issued during the reporting period in this form. One of the public accounting firms based in New York indicated in its annual report that it had not issued any audit reports during the reporting period, the details of which are to be furnished in Form 2. However, the filings made with U.S. Securities and Exchange Commission indicate that the firm had issued an audit report whose details will be furnished in Form 2.

The inspection was conducted by the PCAOB Division of Enforcement and Investigations, which investigated the facts and found the firm guilty of not furnishing complete and accurate information in Form 2 and thereby violating PCAOB Rule 2200. The PCAOB has sanctioned the firm with $25,000 and has also directed the firm to establish policies and procedures for ensuring compliance with PCAOB reporting requirements.

1.2 Public Accounting Firm failure to furnish Form 3

PCAOB Rule 2203 requires the registered public accounting firm to file a special report on “Form 3” to report any event specified in that form within thirty days of the event’s occurrence. One such reportable event is a proceeding initiated on the firm or any of its associated persons.

In the extant case, a firm was aware that it had become a respondent in certain disciplinary proceedings. Such proceedings constituted a reportable event under Form 3, and the firm was required to report the event to the Board on Form 3 within 30 days of occurrence. However, the firm did not furnish any details on Form 3 and inappropriately notified the PCAOB of initiating and concluding a relevant disciplinary proceeding after the applicable deadline, thereby violating the PCAOB Rule 2203.

To protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports, the Board has sanctioned the firm with civil monetary penalty of $ 20,000.

Source: PCAOB News Release

2. IFRS issues updates on SME’s Accounting Standard

To maintain transparency, the International Financial Reporting Standards (IFRS) constantly issues updates. These updates are summary of news, events and other information. Recently, IFRS has issued an update on SME’s Accounting Standard. These updates are briefly discussed here:

(a) Reminder to get involved in consultation on Addendum Exposure Draft

IFRS considers user comments valuable, so it requests its users to submit their comments on the Addendum Exposure Draft. These feedbacks shall be considered in finalising the third edition of the IFRS, SMEs Accounting Standard. This exposure draft sets out two groups of proposals:

(i) Supplier Finance Arrangements

This shall require the SME to disclose its supplier finance arrangements including their terms and conditions, the amount of liabilities that are part of the arrangements, the range of payment due dates and the type and effect of non-cash changes.

(ii) Lack of Exchangeability

The amendment shall also require the SME to apply consistent approach in assessing whether a currency can be exchanged into another currency and estimating the exchange rate to use when it can not be exchanged into another currency.

The addendum exposure draft is open for comment till 31 July, 2024.

(b) Overview of SME Implementation Group Meeting

The SME Implementation Group (SMEIG) is an advisory body that assists the International Accounting Standard Board (IASB) in the international adoption, implementation and application of the IFRS for SMEs Accounting Standards. A virtual SMEIG meeting will be held on 3 September, 2024. In this meeting, SMEIG shall discuss the tentative decisions the IASB has made on the proposals in the 2022 Exposure Draft and shall also respond to the feedback of users on the addendum exposure draft.

(c) IASB Decision on proposals in the 2022 Exposure Draft

IASB has been constantly making decisions on the 2022 Exposure Draft at its every meeting. This update discusses the IASB’s tentative decisions taken at meetings held between April and May 2024. The decision has been made in respect of “Revenue from Contracts with Customers”, “Consolidated and Separate Financial Statements”, and various other topics.

Source: IFRS Foundation

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Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.

Defined benefit plans are post-employment benefit plans other than defined contribution plans.

In case a company has formed a trust fund to carry out the activities of employee benefits which shall provide benefits only to the employees who die during the service period. The company believes that since the benefits are not provided after completion of employment therefore the fund is neither a defined contribution nor a defined benefit plan. However, the EAC of ICAI has a different view regarding it.

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Clause 14(a) requires the tax auditor to state the method of valuation of closing stock employed in the previous year-whether at cost or at market rate or at the lower of the cost and the market rate. It requires the tax auditor to report facts. Whereas, Clause 14(b) requires the tax auditor to state whether there is a deviation from the method of valuation prescribed under section 145A. If the answer is “yes”, the tax auditor must report the details of the deviation and the effect thereof on the profit or loss.

However, the tax auditor is not required to state the appropriateness of the method of valuation employed or whether it is the same as in the preceding year.

This story discusses the tax audit checklist on clause 14 of Form 3CD under the Income Tax Act, 1961.

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A Ltd. herein referred to as “the company” is engaged in the business of crude oil. The company is subsidiary of Oil Industry Development Board (OIDB). To enhance its storage capacity, company plans to construct strategic crude oil storages. The construction cost were provided by parent company. The company has estimated that construction expense would amount to Rs. 20 crore. However, on execution of project the cost of construction got escalated to Rs. 25 crore and company could disburse only Rs. 20 crore as the parent company has only released the payment of 20 crore.

The fund received from parent is accounted as grant income in the Statement of Profit and Loss on a systematic basis over the periods in which the company recognises the expense incurred. However, the company failed to understand the accounting of balance 5 crore as there no certainty regarding source of funds and receipt of funds. Thus, the company did not account the liability for the unpaid invoices of Rs. 5 crore. To correctly account the aforesaid transaction company sought the opinion of Expert Advisory Committee of ICAI.

To understand the accounting treatment suggested by EAC on pre-construction expense for which fund approval is pending from parent company.

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Section 145 provides that the income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” must be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Further, in accordance with Section 128 of the Companies Act, 2013, every company is required to keep books of account on an accrual basis. The provisions of the Companies Act, 2013 are, however, not applicable to entities other than companies further during the year there has been any change in the method of accounting employed vis-à-vis the method employed in the immediately preceding previous year is to be stated.

In this story, we have discussed the detailed checklist for tax audit from sub-clause (a) to Clause (f) of Clause 13 which includes considerations for ICDS. Sub-clauses (a) to (c) of Clause 13 are relevant for all taxpayers, while sub-clauses (d) to (f) specifically pertain to taxpayers using the mercantile system of accounting, aligning with the ICDS requirements stipulated under section 145(2).

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International Panel on Accountancy Education (IPAE) has recently proposed revisions to International Education Standard (IES) 2, 3, and 4 and has explained the same through the exposure draft.

IES 2 prescribes the learning outcomes for technical competence that aspiring professional accountants are required to achieve by the end of Initial Professional Development (IPD)

IES 3 may be helpful to educational organizations, employers, regulators, government authorities, and any other stakeholders who support the learning and development of aspiring professional accountants. It also specifies the competence areas and learning outcomes that describe the professional skills required of aspiring professional accountants by the end of Initial Professional Development.

Further, IES 4 prescribes the learning outcomes that aspiring professional accountants are required to achieve by the end of Initial Professional Development (IPD) for professional values, ethics, and attitudes.

ICAI, being a member of IFAC, considers these proposed amendments as pivotal and hence invites its members to comment on the exposure draft issued by IPAE. Members are encouraged to submit their response/reply by 10th July 2024.

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Global Financial Insights is a weekly feature for the Accounts and Audit Module subscribers of Taxmann.com. It provides you with the latest updates on financial reporting and auditing practices from across the globe. Here is this week’s financial update.

1. Singapore-based company charged with $4.5 billion penalty following fraud verdict

The Securities and Exchange Commission (SEC), through its press release dated June 13, 2024, clarified that a Singapore-based company is held liable for orchestrating years-long fraud involving crypto asset securities. SEC has presented various pieces of evidence citing how the company nearly overnight wiped $40 billion in market value and caused devastating losses to countless investors, including numerous retail investors.

Earlier, on February 16, 2023, the SEC charged the company with securities fraud and offering and selling securities in unregistered transactions. However, the matter was in court, and on April 5, 2024, a jury unanimously held the company liable for securities fraud. Further, as a part of the settlement, the company and its founder were charged with a civil penalty of $4.5 billion.

Source: SEC Press Release

2. ISSB held a meeting to discuss its approach to enhancing the SASB standards

The Sustainability Accounting Standard Board (SASB) of the IFRS Foundation provides SASB standards, which require the entity to furnish industry-based disclosures about sustainability-related risks and opportunities. These disclosures are to be made regarding matters that could reasonably be expected to affect the entity’s cash flows, access to finance, or cost of capital.

Global investors recognize the SASB standards as pivotal as the disclosures made under these standards provide detailed and consistent information about the financial statements. Considering the importance of SASB standards, the International Sustainability Standard Board (ISSB) held a meeting on 12th June 2024 to enhance the reporting and disclosure requirements under these standards. This meeting was held solely for discussion, and no final decisions were made. However, ISSB shall discuss the matter further in the forthcoming meeting and make appropriate decisions.

Source: IFRS Foundation

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P.N. Kumar – [2024] 163 taxmann.com 534 (Article)

1. Introduction

1. Accountancy is the business language because it communicates the financial information of an entity. It enables one to understand the financial performance and achievements of a business entity. It is a tool to know what a person has earned, what he has spent and what he saved. All these measures are in numbers. Therefore, it is said that the accounts took birth from the skill of counting numbers, sometimes in Mesopotamia in 350 BC. In this context, it is rightly said that mathematics is the seed of accounts. Archimedes, father of mathematics, born in 287 BC was responsible to generate the knowledge of Accounting. A person who could do the Act of Counting was nick named as Accountant.
2. In 1494, Mr. Luca Pacioli, introduced a new way to write books. This began the double entry system – a pillar of modern accountancy. The new book was called Ledger, in which entries were made Head Wise. Ledger, therefore, is called the King of Books. The importance of Accountants as a profession came to light, particularly after the enactment of the Joint Stock Companies Act of 1857. An accountant was considered a guard of the interest of the business. Books of accounts became the source of information on the profit and growth of a business. When the Companies Act was amended in 1913, some provisions were made about maintaining at least some books and the manner in which these were to be kept. The contents of the study material had already been developed as subjects of Commerce and accounts, and those who passed the course were qualified to work as accountants.
3. What heights a person of an ordinary family can achieve by following the occupation of an ordinary bookkeeper can be learnt from the life of John D Rock-feller, who died as the richest person in the USA (1839-1937). He is credited for encouraging vocationalism in education. He believed that the best education for poor youth was to prepare them so that they would be able to follow a well respectable occupation when they were adult.
   Turning our attention to India, we take pride in mentioning Sh. K.S. Aiyar (1859-1910), a pioneer of commerce and accountancy, who became the first practicing professional in India. His significant contributions to the field earned him the title of ‘Father of Accountancy in India ‘. He began his practice in Calicut in 1897, later shifting his office to Bombay. His work laid the foundation for the growth and development of accountancy in India.
4. In Independent India, a major milestone was achieved with the establishment of the Institute of Chartered Accountants under the Act of Parliament in 1949. It is recorded that Sh. G.P. Kapadia, who passed out in 1950, was the first member of ICAI, later becoming its first President. This marked a significant step in the professionalisation of accountancy in India. The institute has since produced many renowned professionals, including S/Shri Kumar Mangalam Birla, Deepak Parikh, Rakesh Jhunjhunwala, Motilal Oswal, and Naini Lal Kidwai, who are recognized as the luminaries and icons of the profession.

2. Financial Auditor

1. Any person having basic knowledge of accountancy and fundamentals of mathematics could do the job of an accountant. Later, any person who qualified as a B.Com or M.Com could join as an accountant. There was no stipulation on the qualification for keeping the accounts book and preparing the financial statements. An accountant’s responsibility was to prepare the accounts and present them to the management and later on to the Registrar of Companies.
2. Later, when the stock market developed, true and correct information was to be given to all public investors, as per the requirement of the listing agreement. Therefore, it became essential to get the accounts prepared by a qualified accountant and get the same audited by a Chartered Accountant or firm of CA, in full compliance with the accounts and audit standards, in the prescribed format, in terms of section 44AB of Income Tax Act and section 226–229 of Companies Act of 1956 (now section 139 of Act 2013).
3. With the expansion of demand, the number of qualified accountants increased rapidly. Today, there are 4 lakh registered members, including 1 lakh women members, and approximately 10 lakh students. The demand continues to grow, especially with the requirement under section 138 of the Companies Act 2013 for specified companies to employ Internal Auditors. This expansion of roles and responsibilities signifies a promising future for accountants, who can now work as accountants, statutory auditors, internal Auditors, or even in other business and financial enterprises. These professionals are considered as epitome of creativity, innovativeness, knowledge, integrity, trust, stability, and dependability, as reflected in the logo of the institute.
4. Now is the time for them to introspect on what type of future they envisage for the professionals of Accountancy in India in any of the capacities of an accountant or auditor and as drivers of the business world. The Chartered Accountants of India have the potential to become Vishav Guru in the realm of Business Management.
5. With the growth of business, there was more work, and so there arose the need to evolve or invent some mechanical devices that could help the accountant do his work of bookkeeping and presentation of data in a neat and accurate way. Hand-operating devices for doing multiplication and division, etc., were created by the human brains. IBM machines came into existence to do a large volume of work. Calculators were in vogue with every accountant instead of applying mind/tables. Typewriters were used to type out the narration accompanying the financial data. The ledgers were now machine-made instead of handwritten. At this stage, the concept of verification of data entered by one person by another person was added to the accounting process. This process later on was called Audit.

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A company issuing mortgage guarantees on housing loans primarily provides loss default guarantees to financial institutions. These guarantees are triggered when a borrower defaults and the loan becomes a Non-Performing Asset (NPA). The company then pays the Equated Monthly Instalment (EMI) until the loan is settled, reducing its obligation monthly.

Under Ind AS 109, these guarantees are classified as “Financial Guarantee Contracts” due to their debt obligation and default guarantee features.

This story discusses an EAC opinion to determine the correct classification and revenue recognition for these mortgage guarantees.

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