NEWSLETTER. August N. A. SHAH ASSOCIATES Chartered Accountants

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1 NEWSLETTER August 2012 N. A. SHAH ASSOCIATES Chartered Accountants

2 1 ACCOUNTING AND AUDITING Expert Advisory Opinion Exposure Draft on Amendments in IND AS...4 The contents provided in this newsletter are for information purpose only and are intended, but not promised or guaranteed, to be correct, complete and up-to-date. The firm hereby disclaims any and all liability to any person for any loss or damage caused by errors or omissions, whether such errors or omissions result from negligence, accident or any other cause. For Private circulation only 1

guaranteed, to be correct, complete and up-to-date.

3 1 Accounting and Auditing 1. Expert Advisory Opinion Accounting treatment of liability for unbilled work-in-progress in the books of executing agency. A. Facts of the case: a. A Government company was set up as special purpose vehicle for executing infrastructure development and related projects in a state. The project has been entrusted to the company in the capacity of executing agency through MOU (memorandum of understanding). The company is not appointed in the capacity of a contractor. The ownership interest relating to project assets and liabilities vest with the Government. Financing of the project is through borrowings from banks and financial institutions against guarantee of the state government. b. The company is charging development fees at certain pre-fixed rate of development expenditure incurred, to the Government towards the services rendered. The company in turn engages the services of various contractors who are required to use their own men, materials and machines. The company does not supply any of these. The contractor raises the running account bills on the company for the work done and final bill is raised after the completion of the project. The billing period generally falls into two or more financial years. c. The company is providing for the liability towards work executed upto the financial year-end based on bills received from contractors till finalization of accounts. However, based on the advice of CAG of India, the company started providing for work executed till year end towards work for which bills have not been received, on the basis of estimated value worked out by engineering department of the company. This often resulted into excess booking of workin-progress and liability and excess deduction and payment of tax at source. d. The Audit Committee of the company was of the opinion that there is no need to provide for any liability towards unbilled work in progress on estimated value basis in view of the following points: i. The company has no right to title, ownership or interest in the said unbilled work-in-process as the material and labor belong to contractor. ii. The insurance company will settle the claim proportionately, in case of destruction of such work-in-progress i.e unbilled portion to the contractor and billed/ booked portion to the company. For Private circulation only 2

The project has been entrusted to the company in the capacity of executing agency through MOU (memorandum of understanding). The company is not appointed in the capacity of a contractor.

4 iii. Under various laws such as Indian Contract Act, Transfer of Property Act, Sale of Goods Act, until the bills are raised by the contractor, ownership of unbilled WIP remains with contractor. iv. Since materials belong to contractor and company is not raising sales bills, matching principle does not apply. v. Contractor will also show unbilled work-in-progress in his balance sheet as current assets and consequently it will amount to showing the same asset twice under two ownerships. B. Query Whether the company should recognize liability in respect of unbilled work-inprogress? C. Points considered by the committee: a. The basic issue raised relates to accounting for liability in respect of unbilled portion of work-in-progress in the books of the company for a project which has been entrusted to it in the capacity of executing agency. b. On perusal of the MOU, it was observed that ownership interest relating to project assets and liabilities vest with the Government. The company is acting merely as an executing agency of the Government. The future economic benefits from the project assets are not expected to flow to the company. On completion of the project, the assets would be taken over by the Government. The project assets are funded by the Government and not by the company. Accordingly, the liabilities which arise during the transactions are those of the Government and not that of the company. Thus all the significant risks and rewards relating to ownership of project assets and liabilities vest with the Government. c. In so far as the company is concerned, project assets and liabilities do not meet the definition of Asset and Liability respectively as defined in the Framework for the Preparation and Presentation of Financial Statements issued by Institute of Chartered Accountants of India. d. On the basis of the above, liability for work-in-progress and corresponding asset (billed or unbilled work-in-progress) in respect of the project, would not be recognized in the books of account of the company. D. Opinion On the basis of the above, the committee is of the opinion that the company should not recognize liability in respect of unbilled work-in-progress under construction contract as the company is merely an executing agency of the Government and all the project assets and liabilities belong to the Government and not to the company. For Private circulation only 3

Contractor will also show unbilled work-in-progress in his balance sheet as current assets and consequently it will amount to showing the same asset twice under two ownerships. B.

5 2. Exposure Draft on Amendments in IND AS The Institute of Chartered Accountants of India has issued exposure draft in respect to certain amendments in Indian Accounting Standard for Presentation and Disclosure of Financial Instruments a. Ind AS 32, Financial Instruments: Presentation b. Ind AS 107, Financial Instruments: Disclosures. For Private circulation only 4

for Presentation and Disclosure of Financial Instruments a.

Accounting for Real Estate Developers. Presented by: CA. Sandeep Shah Partner N A Shah Associates

Accounting for Real Estate Developers Presented by: CA. Sandeep Shah Partner N A Shah Associates 1 Contents Background Accounting under Indian GAAP Accounting under IFRS Exposure draft-revenue from Contracts