Institute of Cost & Works Accountants of India3Institute of Cost & Works Accountants of India5Institute of Cost & Works Accountants of India7Institute of Cost & Works Accountants of India9Institute of Cost & Works Accountants of IndiaThis is lowest level in the maturity scale of11This is a higher level of maturity where the playersThis is the highest level of maturity among theInstitute of Cost & Works Accountants of IndiaPlethora of legacy practices of costA National standard level of cost accountingA self driven level of world class cost/13Institute of Cost & Works Accountants of India15Institute of Cost & Works Accountants of India17Maintenance of cost accounting records by the corporateMaintenance of cost accounting records by the corporateAs recommended by the Working Group, this may be doneNo change in the existing provisions under sectionIn place of all the existing CARRs, single combinedScope of CARR should cover all companies (except theNo change in the existing provisions under sectionInstitute of Cost & Works Accountants of IndiaAll the Cost Accounting Standards issued by ICWAISingle combined CARR as notified in Phase-I shouldThe existing provisions under section 209(1)(d) of theScope of CARR as notified in Phase-II above shouldICWAI should issue simplified format/proformae for19For certain regulated industries such as electricity,A sample of combined simplified CARR is enclosed asInstitute of Cost & Works Accountants of IndiaThe aggregate value of the machinery and plant installedThe aggregate value of the turnover made by the companyThe company’s equity or debt securities are not listed orIt is not a bank, financial institution or an insuranceIt does not have borrowings (including public deposits) inIt is not a holding or subsidiary company of a company21All medium sized companies should maintain costWith a view to avoiding incidence of any additionalSuch companies should only file a compliance reportMedium size companies should be classified based onOther conditions that would apply to a medium sizeInstitute of Cost & Works Accountants of IndiaThe aggregate value of the machinery and plantThe aggregate value of the turnover made by theThe company’s equity or debt securities are notIt is not a bank, financial institution or anIt does not have borrowings (including public deposits)It is not a holding or subsidiary company of a23Institute of Cost & Works Accountants of India25Institute of Cost & Works Accountants of India27Institute of Cost & Works Accountants of India29Institute of Cost & Works Accountants of India31Institute of Cost & Works Accountants of India33Institute of Cost & Works Accountants of India35To provide a structured approach to measurement of costsTo integrate, harmonise and standardize cost accountingTo provide guidance to the users to achieve uniformity andTo arrive at the basis of computing the cost of product,To enable practicing member to make use of CostTo assist in clear and uniform understanding of all theInstitute of Cost & Works Accountants of IndiaAll the existing Cost Accounting Standards may also beThe revision of existing CAS as per the revised frameworkWithin the revised framework of CAS, ICWAI should issueICWAI should assign utmost priority for issue of all the CASCAS may also be issued for all those areas (excluding theCost Accounting Standards Board and the Council of37There should be complete alignment, synergy &The Cost Accounting Standards Board of ICWAI, inOn specific cost related issues which require differentAll the Cost Accounting Standards will also have to beWithout sacrificing the basic objectives, the CAS shouldCAS should also follow, wherever applicable, the principlesEither the existing mandate of NACAS may be modified or aInstitute of Cost & Works Accountants of India39Institute of Cost & Works Accountants of India41All the services and other social sectors such asInstitute of Cost & Works Accountants of IndiaThe existing principles & practices of cost accountingAll the infrastructure sector activities which includeAll public service organisations should determine userMost of these sectors, services, functions or activities43Ministry of Corporate Affairs and the Chief Adviser CostThe Institute of Cost and Works Accountants of IndiaThe Controller General of Civil Accounts and theInstitute of Cost & Works Accountants of India45Institute of Cost & Works Accountants of IndiaCOST ACCOUNTING RECORDS 13-22
REPORT OF THE EXPERT GROUP TO REVIEW
THE EXISTING COST ACCOUNTING RECORDS
RULES, COST AUDIT REPORT RULES AND
COST ACCOUNTING STANDARDS – A BRIEF
(This document contains a brief of the Expert Group Report. For clear
understanding, Members are requested to read Part-II of the Report)
CONSTITUTION OF THE EXPERT GROUP
• To enable development of relevant cost accounting
methodologies and standards to increase the competitiveness
of the Indian manufacturing sector and to advise the
Government on suitable measures for the same, Government
of India, Ministry of Corporate Affairs vide their Order dated
21st January 2008 constituted an Expert Group under the
chairmanship of Shri B.B. Goyal, Adviser (Cost), Ministry
of Corporate Affairs. Other members of the Group were
drawn from MCA, CII, FICCI, ASSOCHAM, PHDCCI, ICAI
and ICWAI. The Group co-op ted various CEOs/CFOs of top
public/private sector companies, academicians, management
consultants, representatives of regulatory bodies, accounting
standards & IFRS experts, CII-TCM working group member,
user ministries, financial institution directors, company law
experts, etc. The Group was asked to undertake the following
tasks.
a) Review the Cost Accounting Record Rules and their continued
relevance in the contemporary competitive environment as
per the presently prescribed structure / format, and make
recommendations for requisite modifications and / or
alternative structures;
2
b) Review the existing Cost Audit Report Rules and formats
prescribed therein, and recommend appropriate modifications
to make them more relevant to the needs of different
stakeholders including company management, shareholders,
regulators, etc;
c) Review the existing system with a view to making suggestions
for addressing the concerns of the industry with regard to
confidentiality of company cost data and cost of compliance;
d) Review and, if required, give suggestions for redrafting the
existing Cost Accounting Standards in the Indian context in
light of international best practices, and to align them with
the international cost accounting standards issued by
International Federation of Accountants (IFAC).
The Group submitted its Report to MCA on 26th
December, 2008.
KEY ECONOMIC ISSUES
• The Expert Group embarked upon a major challenge to find a
place for cost linkages in the following three important
determinants in the Indian and global milieu:
› Focus shift from Corporate Governance to Enterprise
Governance;
› Competitiveness of Indian Industry and the Economy; and
› Strengthening the Regulatory Mechanism
Corporate/Enterprise Governance:
• Corporate governance is about how companies are directed and
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controlled. The prime responsibility for good governance must
lie within the company rather than ·outside it. Designing and
implementing corporate governance structures are important, but
instilling the right culture is essential. Today, if an organization
has to survive and thrive in a commercial environment that is
becoming increasingly global in its outlook, it has got to factor in
the interests and concerns of every stakeholder in the business. It
is in this context that corporate governance has assumed greater
significance.
• Audits like Cost Audit and Corporate Social Responsibility (CSR)
are elements of a corporate governance system. Enterprise
governance substitutes corporate governance in the context of
contemporary competitive scenario and increased consciousness
to align the company to the global practices and standards. The
enterprise governance is to focus in ensuring the competitiveness
of the enterprise in the global context. This would strengthen the
competitiveness of the Industry in which the enterprise is
positioned and consequently the competitiveness of the Indian
economy in the global context gets strengthened. Corporate
reporting system needs to be strengthened through appropriate
efficiency audit practices. In this connection, it is significant to
appreciate the need to position cost audit in the enterprise
governance structure. Clause 49 of SEBI guidelines on Listing
Agreements mentions about performance monitoring, it must be
duly amended to focus and to conform to the cost audit structure
so that companies report on the efficiency performance in more
detail and to the benefit of the stakeholders in evaluating the
company.
• Cost audit, supported by cost accounting standards, can provide
relevant and credible cost and revenue data to regulators to support
4
their decisions. Moreover, cost audit can provide relevant reports
to the board of directors to strengthen its oversight function.
Therefore, in a market economy, cost audit with changed emphasis
on efficiency is as relevant as it was in a controlled economy. In
an environment where ‘stakeholder theory’ of corporate
governance is still rhetoric and management focus is on capital
market, cost audit will help to protect the interest of stakeholders
including investors. It will also help optimal use of national
resources.
• A nation’s competitiveness is the sum up of individual firm’s
competitiveness. There are no two opinions that to survive, endure
and prosper in today’s hypercompetitive environment, enterprises
of all sizes need to explore strategies to build competitiveness.
To achieve competitiveness, while earlier theories emphasized
on Total Quality in Management (TQM); the modern thinkers
give equal weightage to the Total Cost Management (TCM).
While the core attribute of TQM is its focus on customer and
takes a total system view in linking the various business processes
to provide a flexible response to customers; that of TCM is on
cost management. Towards this, recent innovations suggested new
tools and techniques such as Activity Based Costing, Target
Costing, Lifecycle Costing, Quality Costing, Value Engineering,
Supply Chain Management, Balanced Scorecard, Performance
Pyramid, Lean Accounting, Theory of Constraints, Throughput
Accounting, Kaizen Costing, Customer Valuation, Strategic Cost
Management, and so on and so forth. In line with TQM argument,
it is argued that TCM holds the key to competitive advantage.
• In the context of evaluating the economic competitiveness, the
significance of cost management in enterprises cannot be
underestimated. In this connection the Confederation of Indian
Institute of Cost & Works Accountants of India
Industries (CII), through its Total Cost management (TCM)
Division, had studied the cost management practices in different
companies, both in the manufacturing and services sector. The
study had evolved the concept of five maturity levels of companies
in cost management. It also suggested the mechanism of
certification of cost management practices in companies so as to
makes companies more efficiency driven and competition
conscious. The first three levels of maturity are clear stages of
development in competition ladder and essential for any company
in the modern competitive era. They focus on basic cost
information, appropriately computed cost centre wise, system
based cost data support for decision making processes, and finally
ensuring that the cost information system thus evolved is used in
operationalising the strategies for measuring productivity,
profitability etc. The significance of cost information is greatly
emphasized in the process of gaining competitive strength by
companies. Further in the ladder, the study brings out the emphasis
on Total Cost Management approach by companies being
competitive and in the process become a benchmark for cost
management and competitiveness, for others in the industry. The
five stages, forming part of the Maturity Model as evolved by
CII-TCM division, are significant indicators of the relevance of
the cost information and an assurance process required for its
effective implementation.
• The Expert Group agrees with the conclusions of the study and
the model so evolved. It is clear that an appropriate cost
management system is required in all business units to remain
competitive and the Government should ensure through a legal
framework that companies do install such a cost management
system in their respective governance, and also an effective
6
assurance service mechanism so that the cost competitiveness of
Indian industries is addressed through the assurance (Cost Audit)
process which ultimately would ensure the competitiveness of
the industry and the economy as a whole.
• In developed economies there are no explicit legal interventions
needed that make the companies to comply with laid out rules on
cost information systems. However, in developing economies like
India, legal interventions are required for making companies to
appreciate the need for cost information systems as a source for
gaining competitiveness and also to ensure such cost information
systems are based on well recognised principles of accounting
and costing techniques. While there is widespread recognition of
introducing an effective Enterprise Risk Management Systems
in all companies, such risk management system would require
good cost information system. Therefore, such a system should
continue to exist to ensure that companies maintain appropriate
cost information system and slowly mature in cost management
mechanisms. A cost Audit system would ensure that such systems
are in place in all companies.
• The reorientation of the economy from an import-substituting
industrialization to export-led growth makes the improvement in
the state of competitiveness even more necessary. This would
require a directional movement of the industries and hence the
need for reorienting the companies of all sizes towards the goal.
The tools like cost management would go to strengthen these
directional strategies of the Government and the latter would be
correct in positioning appropriate legal system to ensure, among
many other important mechanisms, that companies follow cost
management techniques under a declared assurance system and
ensure the competitiveness of their unit and thereby the
Institute of Cost & Works Accountants of India
competitiveness of their respective industry and the economy as
a whole.
Regulatory Framework:
• Economic regulation, a form of government intervention, is
designed to influence the behaviour of firms and individuals in
the private sector. Regulation is a complex balancing act between
advancing the interests of consumers, competitors and investors,
while promoting a wider ‘public interest’ agenda, minimum prices
to benefit the consumer (maximize consumer surplus); ensure
adequate profits are earned to finance the proper investment needs
of the industry (earn at least a normal rate of return on capital
employed); provide an environment conducive for new firms to
enter the industry and expand competition (police anti-competitive
behaviour by the dominant supplier); preserve or improve the
quality of service (ensure higher profitability is not achieved by
cutting services to reduce costs); identify those parts of the
business which are naturally monopolistic (statutory monopolies
that are not necessarily justified in terms of either economies of
scale or scope); take into consideration social and environmental
issues (e.g. when removing cross subsidization of services).
• While regulation has significant relevance in the current economic
scenario, cost data fed regulational issues are also many and worth
considering while examining the relevance and usefulness of cost
data of companies. For tariff fixation/approvals in public utilities
like electricity, for ensuring objective subsidy policy, to ensure
operational regulation within competitive practices, checking
transfer pricing practices, etc. are some of the areas that would
require adequate cost audit systems. Admittedly, these factors
are not addressed in financial reporting mechanisms. In fact, the
8
nuances of competitive regulation would require elaborate cost
data for ensuring that anti-competitive policies are not followed.
Cost data has become imperatively mandatory under the WTO
regime. The existing costing practices are poor in providing
structured mechanisms for a good analysis of the cost information.
Hence there is an urgent need to evolve mechanisms to ensure
structured cost data in companies in all the sectors and a structured
system to provide assurance service through cost audit
mechanisms.
• At present, the regulatory bodies have prescribed their own
formats in which the companies are required to submit the
necessary cost information. In the absence of accurate and reliable
cost data at the end of the companies/utilities, the regulatory bodies
cannot discharge their statutory responsibilities in, say, fixing
the correct tariff and other charges. They take the certified cost
data in the prescribed formats from the companies/service
providers. Such data is generated from the companies costing
systems and if they are not well designed and implemented, even
the certified copies may not provide relevant and reliable data to
the regulatory bodies on which they base their decisions. Hence,
it is highly mandated and imperative to ensure that the companies
are maintaining proper records of costing through well designed
costing accounting system and get these records duly audited/
certified from an independent cost expert.
CONSULTATIONS WITH STAKEHOLDERS
• For holding consultations with various stakeholders, the Expert
Group devised a detailed Questionnaire on the existing and revised
framework of cost accounting and cost audit in the corporate
sector. The Questionnaire was circulated to all the interest groups
Institute of Cost & Works Accountants of India
such as user ministries/departments, regulators, companies
(public, private & co-operative), academicians/experts,
management consultants, practicing professionals, all the central
council members and past presidents of ICWAI, etc. Further, in
order to ensure clear understanding of the all the related issues,
the Group held personal discussions/consultations in open-house
meetings at select cities in the country. Apart from participation
in the open-house consultations, written responses were received
from a large number of stakeholders.
• These responses have been tabulated and analyzed. Majority of
all the respondents, including various regulators & user
departments/agencies (SEBI, CCI, NPPA, FICC, CERC, C&AG,
PNGRB, CAC, Tariff Commission, Tea Board, DGAD, etc.);
Navratna/Miniratna PSUs (ONGC, IOC, BPCL, HPCL, GAIL,
NTPC, NHPC, CIL, NLC, SAIL, RINL, BHEL, BEL, CEL,
BEML, MTNL, NALCO, NMDC, NFL, NTC, PGCIL, GACL,
etc.); major private sector industrial conglomerates/ companies
(Tata, Birla, Reliance, ITC, Mahindra, Bajaj, Jindal, Mallaya,
Muthiah, TVS, Maruti Suzuki, Dabur, HUL, Ashok Leyland,
Asian Paints, BPL Mobile, Cadila, Finolex, Ford, HML,
Kirloskar, Nestle, NDPL, Subros, Sundaram, Swaraj, W.S.
Industries, etc.); major industry associations (CII, FICCI,
ASSOCHAM, IBA, PHDCCI, CCFI, etc.); IIMs, and ISB,
Hyderabad; ICWAI and leading management consultants have
broadly agreed with the revised framework as proposed by the
Expert Group. Views of various stakeholders have been
summarized in chapter 5 of the Report.
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INTERNATIONAL FEDERATION OF ACCOUNTANTS
(IFAC), GLOBAL COST ACCOUNTING PRACTICES AND
THE MATURITY MODEL
• Expert Group concluded that in the approach of IFAC, there is a
major focus shift from the corporate governance to the enterprise
governance. Hence, to achieve the objectives of enterprise
governance, the content and relevance of purely financial
accounting data and information, as a means to evaluate
performance, is poised for a sea change. In this context, IFAC
has started recognizing the need for adequate cost information
and reporting framework to the governing body of enterprises
for risk-management and decision making needed to enhance the
stakeholders’ value. IFAC has also very clearly highlighted the
usage of such framework in the functioning of government and
other public agencies.
• From the cross-country cost & management accounting practices,
the Expert Group observed that these largely depend upon the
maturity level of each economy in terms of its competitiveness,
liberalisation & globalization, business pattern/models, average
size/scale of an enterprise, risk-management models, market &
information network, level of corporate/enterprise governance,
strategic strengths & weaknesses, cost-leadership movement,
sustainable cost reduction practices, extent of applied research,
benchmarking, etc. Three maturity levels are recognized regarding
the Regulation System in an economy:
LEVEL-I :
regulation. This is a level where the Government has to perform
role of regulation completely by itself. It makes detailed rules,
procedures etc.; it monitors them whether they are properly
Institute of Cost & Works Accountants of India
followed; and punish those who are not abiding by these rules.
This provides practically no flexibility to the players for necessary
growth with the change in time and conditions; enforcement of
the rules is usually through by force; and it leads to sometime
unnecessary interference from the side of the Government.
LEVEL-II :
in the economy have become more matured; they start
appreciating role of discipline in the economy; started coming
out voluntarily with models of self discipline; Government role
reduced to provide necessary direction and guidance so as to
achieve the desired objectives of the economy. At this level,
independent regulators are given the responsibility of monitoring
and ensuring the necessary discipline among the players of the
economy.
LEVEL-III :
players of the economy. At this level, every player is well
conscious about his/her responsibilities; develops systems to
ensure that necessary self-disciple mechanism exists so as to
achieve the objectives of the whole economy and as well as those
of stakeholders. At this stage, the Government role is practically
non-existent in the regulation mechanism; market forces play more
dominant role in disciplining the market.
• The Expert Group strongly believes that the Indian economy is
at a maturity level of II. Therefore, instead of strict rules and
laws, Indian industry needs directions, principles and guidance
from the Government. At this maturity level, the Group feels that
the industry should be given more freedom and flexibility and
ultimately, over a period of time, the industry will achieve
sufficient maturity level where driving force will be self discipline
rather than any law of the Government. Till Indian industry
12
reaches at the highest level of maturity, there is a need for
monitoring & compliance mechanism.
• The transitory phase through which economies like India are
passing, having moved from being under-developed to developing
and now to a fast developing and finally gradually heading towards
the developed stage still require suitable regulatory mechanism.
Thus, besides routine financial information and other disclosures,
companies should be subjected to a cost-effective cost &
management information system, enabling the Government and
regulatory authorities to play their intended role in enhancing the
competitiveness of Indian industry and ensuring a fair-play for
all stakeholders.
• In an identical approach, the Confederation of Indian Industries
(CII), through its Total Cost management (TCM) Division, had
looked into the following maturity levels for devising a strategy:
Base Level :
accounting/management
Level II :
discipline
Level III :
management accounting
• The Expert Group is of the view that migrating through above levels
should be at great speed and especially Level II will require statutory
drive through standard cost accounting practices for the entire
corporate sector. Once an enterprise crosses Level II into Level III, it
will be in a mode of voluntary adoption of all cost and management
accounting standards/guidelines to be issued by professional bodies
either for internal financial management or for external reporting.
Considering the above the Expert Group recommends:
Institute of Cost & Works Accountants of India
Phased introduction of cost accounting and cost audit
framework in all companies to achieve the highest levels of
competitiveness, the Expert Group recommends that only such
companies maturing into higher levels of adoption of best cost
and management accounting practices/guidelines may be
permitted voluntary compliance.
COST ACCOUNTING RECORDS
• Section 209(1) of the Companies Act, 1956 primarily relate to
maintenance of books of account by the companies that includes
cost records as well. This section does not insist on having separate
books for maintaining particulars relating to costs referred to in
clause (d) of sub-section (1) thereof. The law does not distinguish
between the books of account maintained by a company either
for the purposes of financial statements or for the preparation
and presentation of cost statements. While financial accounting/
reporting is supported by the principle based accounting standards
approved by NACAS and adopted as Companies (Accounting
Standards) Rules, 2006, a differential treatment has been accorded
to cost accounting by prescribing separate rules/formats.
Therefore, the Expert Group recommends:
Individual Cost Accounting Records Rules (CARR)
prescribing product wise formats for maintenance of cost
records are not required. As such, necessary cost data should
logically emanate from the same set of primary books of
account and other accounting data/records.
• In the Objects & Reasons of the Bill seeking insertion of clause
(d) under sub-section (1) of section 209 of the Companies Act,
1956, in the Report of the Joint Select Committee, and in the
14
statements of the then Hon’ble Finance Minister made in reply to
the debate in Rajya Sabha, it was stated that (a) maintenance of
proper cost accounting records by the companies is essential which
would make the efficiency audit possible; (b) all companies
belonging to class of companies engaged in the production,
processing, manufacturing or mining activities to include in their
books of account particulars relating to the utilisation of materials,
labour or other items of cost; and (c) every producing/
manufacturing company to employ a cost accountant and to have
a cost accountant’s report in regard to the product(s) that it
produces. The Group noted that the term “class of companies”
belongs to all such companies that are engaged in the production,
or processing, or manufacturing or mining activities. However,
“class of companies” has been interpreted to mean companies
engaged in the manufacture of a particular product or those
belonging to a specified industry. Accordingly, Central
Government has been prescribing separate CARR for each
industry or product by assigning it the meaning as “class of
companies”. The Group recommends that:
In order to enhance the competitiveness of the company, the
term “class of companies” under the existing section 209(1)(d)
of the Companies Act, 1956, should be considered at the
company level rather than at the product level. This will
facilitate focus shift to the enterprise governance.
• The Group noted that with globalisation, the entire world economy
is integrating into one single, huge system where geographic
boundaries are fading out and protecting umbrellas held by
governments over the industry and national economy are gradually
closing down. In this ‘borderless’ world, one has to venture out
not only for survival but also for life-supporting growth and
Institute of Cost & Works Accountants of India
prosperity. In this context, strategic cost management plays the
most vital role. In the present economic scenario, maintenance of
cost records in a systematic manner is essential for all companies.
It is also considered necessary to provide requisite cost inputs to
various regulators and government departments/bodies to protect
the interest of consumers and investors and to protect the industry
from unfair trade practices under WTO agreements. In a survey
conducted by the Expert Group, there has been a general consensus
among all the respondents that all companies should maintain
cost records as an integral part of books of account, but to be left
free to follow and apply relevant method of cost management.
The Group recommends that:
All companies (excluding the exempted categories), should
maintain cost accounting records in respect of utilisation of
materials, labour or other items of cost, as an integral part of
books of account. However, in order to promote uniformity
and consistency in the preparation and presentation of cost
statements under different statutes and under WTO, it is also
recommended that such cost accounting records should adhere
to the cost accounting standards issued by ICWAI that have
integrated, harmonized and standardized the generally
accepted cost accounting principles and practices. The above
should be introduced in a phased manner as recommended in
a later paragraph.
• The Group noted that cost management is distinct from the cost
accounting. Therefore, the Expert Group recommends that:
It should be the management’s prerogative to choose
appropriate cost management framework. The Group also
recommends that the Government, professional bodies and
16
industry associations should play a pro-active role in
promoting such competitiveness of India Inc. by undertaking
sector-based competitiveness and benchmarking studies. The
Group further recommends that ICWAI should undertake an
exercise to suggest sector specific standard costs on priority
basis.
• The Group noted that all the existing 44 Cost Accounting Records
Rules (CARRs) carry almost identical prescripttion and formats
(except for some industry specific minor variations) for
maintaining cost accounting records by the companies. The Group
also noted that these rules are incomplete documents that lack
clarity leading to presentation of non-uniform and inconsistent
results; create conflict with the parent Statute; force companies
manufacturing multiple products to follow multiple rules; leave
no room for flexibility with the company management to follow
one standard cost accounting system suited to its’ size, scale &
type of operations; and results in companies incurring huge cost
in preparing cost records as per the notified rules/formats. The
existing mechanism can be considered as the prescripttive
methodology rather than a principle based approach. The Expert
Group has concluded that in the present competitive scenario
having rapid changes in all dimensions, different needs of the
industry can be met only from principle based costing system
that would result in its value addition, flexibility and innovations.
Based on the wide-spread opinion expressed by all categories
of stakeholders to provide due flexibility to the companies to
have a sound cost accounting framework, as also to reduce
their compliance cost, the Expert Group recommends as
under:
Institute of Cost & Works Accountants of India
a.
sector should be shifted from the existing rule/formatbased
mechanism to a principle-based mechanism having
universal application.
b.
sector should be based on generally accepted cost
accounting principles that have to be integrated,
harmonized and standardized in the Cost Accounting
Standards (CAS) to be issued by ICWAI in consultation
with all stakeholders and in harmony with the Indian
GAAP and Accounting Standards. The Group has already
made detailed recommendations in the relevant chapter
on CAS.
c.
in a phased manner as under:
Phase-I:
•
209(1)(d) of the Companies Act, 1956 required.
•
CARR should be notified.
•
micro & small companies) engaged in the production,
processing, manufacturing or mining activities.
Phase-II:
•
209(1)(d) of the Companies Act, 1956 required.
18
•
should be adopted under the Companies Act, 1956
based on the recommendations of either the existing
NACAS or a similar body to be set-up.
•
be replaced with modified CARR containing
adherence to the Cost Accounting Standards issued
by ICWAI.
Phase-III:
•
Companies Act, 1956 should be amended as under:
Section 209(1)(d): Every company shall keep at its
registered office proper books of account with respect
to utilization of material or labour or to other items of
cost as may be prescribed by the Central Government.
The Central Government may, by notification in the
Official Gazette, exempt any company or class of
companies from compliance with any of the
requirements of section 209(1)(d), if in its opinion, it is
necessary to grant the exemption in the public interest.
•
cover all companies.
d.
preparation and presentation of requisite cost data/
information for the benefit of industry & professional
fraternity.
Institute of Cost & Works Accountants of India
e.
telecommunications, petroleum & natural gas, etc., ICWAI
should issue industry-specific guidelines in consultation
with the concerned regulatory body and industry
association.
f.
Annexure-XVII, Page 614 of the Expert Group Report).
• Keeping in view the existing provisions and the IFAC
observations, the Group recommends that:
The existing provision of exemption to small scale industrial
undertakings, as defined in the Industries (Development and
Regulation) Act, 1951 from the requirement of maintaining
cost accounting records should be continued.
• As regards the threshold limit for identifying such small scale
industrial undertakings, the Group already noted that the limit
for the value of machinery & plant that was earlier fixed as Rs.3
crore has been revised to Rs.5 crore as per the Micro, Small and
Medium Enterprises Development Act, 2006. Therefore, this has
to be revised accordingly. Accordingly, the Expert Group
recommends that:
All micro and small scale industrial undertakings, as defined
in the Micro, Small and Medium Enterprises Development
Act, 2006 should continue to remain exempted from the
requirement of maintaining cost accounting records even if
they belong to class of companies engaged in the production,
processing, manufacturing or mining activities, subject to the
following conditions. Such companies should also remain
outside the ambit of cost audit.
20
a.
wherein, as on the last date of the immediate preceding
accounting year, does not exceed limit as specified for a
small scale industrial undertaking under the provisions
of Micro, Small and Medium Enterprises Development
Act, 2006;
b.
from sale or supply of all its products during the immediate
preceding accounting year does not exceed twenty crore
of rupees;
c.
are not in the process of listing on any stock exchange,
whether in India or outside India;
d.
company;
e.
excess of rupees five crore at any time during the
immediately preceding accounting year; and
f.
which is not a small sized company.
• The Group noted that medium size companies are not presently
exempted from the application of CARRs. Such companies would
necessarily require requisite cost data/information for internal
purposes as well as for legal or statutory purposes. Hence, the
Group is of the view that there appears no justification in granting
them exemption from merely maintenance of cost records as they
would draw much greater benefits from such mechanism and it
Institute of Cost & Works Accountants of India
would also help them to comply with any type of legal/statutory
requirements. Therefore, the Expert Group recommends as under:
I.
accounting records based on generally accepted cost
accounting principles and cost accounting standards,
as may be notified under section 209 (1)(d) of the
Companies Act, 1956.
II.
cost of compliance, such class of companies should also
be exempted from the provisions of cost audit under
section 233B of the Act.
III.
with the Central Government, on a proforma to be
notified, from a cost accountant certifying requisite
maintenance of cost accounting records, as notified
under section 209 (1)(d) of the Act.
IV.
investment in plant & machinery exceeding Rs.5 crore
but not exceeding Rs.10 crore (as defined in the statute)
and annual turnover exceeding Rs.20 crore but not
exceeding Rs.50 crore in the immediately preceding
accounting year. While calculating annual turnover, any
turnover from trading operations, consultancy services,
other incomes, etc. in a manufacturing organisation will
not be considered. But turnover from job work or loan
license operations would stand included.
V.
company shall be as under:
22
a.
installed wherein, as on the last date of the
immediate preceding accounting year, does not
exceed limit as specified for a medium size
industrial undertaking under the provisions of
Micro, Small and Medium Enterprises
Development Act, 2006;
b.
company from sale or supply of all its products
during the immediate preceding accounting year
does not exceed fifty crore of rupees;
c.
listed or are not in the process of listing on any stock
exchange, whether in India or outside India;
d.
insurance company;
e.
in excess of rupees ten crore at any time during the
immediately preceding accounting year; and
f.
company which is not a small and/or medium sized
company.
AUDIT OF COST ACCOUNTING RECORDS
• The Expert Group noted that owing to notification of industry/
product wise separate Cost Accounting Records Rules under
section 209(1)(d) of the Companies Act 1956 and thus issue of
Institute of Cost & Works Accountants of India
multiple cost audit orders under section 233B for a single company
producing multiple products has led to large number of anomalies/
difficulties. Therefore, the existing practice of notifying industry/
product wise CARR and ordering product-wise cost audit orders
only on selective companies, seeking unit-wise cost details and
other data/information, does not support to any justification either
from the user (i.e. the Government) point of view or from the
provider’s (i.e. the company) viewpoint. Such a situation should
be avoided and rectified. In view of this, the Expert Group
recommends that:
The existing practice of notifying industry/product wise CARR
and ordering product-wise cost audit orders only on selective
companies, seeking unit-wise cost details and other data/
information, should be dispensed with.
• In para 13.116 of the Report, the Expert Group has elaborated in
detail all issues relating to the utility of cost audit reports, cost
data/information, and the need to review the existing mechanism/
framework. The Expert Group also noted that in a country-wide
survey conducted, it was found that different stakeholders/interest
groups are in total support of continuation of the existing
mechanism of cost audit, but with simplification of the structure/
formats as contained in the existing Cost Audit Report Rules,
2001. Further, such practices of cost accounting, audit & assurance
do prevail in many developed/developing countries, across the
globe, in varying degrees, content and structure. Large numbers
of external interest groups for cost data/information exist in these
economies.
• On the issue of audit, assurance & good governance, the
International Federation of Accountants (IFAC), in its various
documents, has observed that (a) creation and optimization of
24
stakeholder value should be the objective of governance; and (b)
the conformance and performance dimensions of governance are
both important to optimize shareholder value. IFAC further said
that costing methodologies applied in organizations, measures
the consumption of economic resources and support the
accountability of business performance. Cost audits help to
ascertain whether an organization’s cost accounting records are
so maintained as to give a true and fair view of the cost of
production, processing, manufacturing, and mining of a product.
Therefore, cost audits can be used to the benefit of management,
consumers and shareholders by (a) helping to identify weaknesses
in cost accounting systems, and (b) to help drive down costs by
detecting wastage and inefficiencies. Cost audits are also of
assistance to governments in helping to formulate tariff and
taxation policies.
• In view of above, the Expert Group strongly endorses the Working
Group’s recommendation that:
There is need to continue the cost audit mechanism. However,
to save costs, to ensure complete confidentiality of company’s
sensitive cost data and to avoid any possible misuse, present
structure of cost audit report need to be modified and the
formats prescribed therein needs to be simplified.
• The Group noted that in the existing framework, there is no
mechanism to capture data/information with respect to all such
companies that are covered by the provisions of section 209(1)(d)
of the Companies Act, 1956 and the Rules notified there under.
The Group further noted that in the absence of such data/
information, Government finds it difficult to decide as to which
companies should be covered under the cost audit under section
233B of the Act. Hence, the Group noted that selective coverage
Institute of Cost & Works Accountants of India
of companies for cost audit not only leads to adopting total ad
hoc & arbitrary approach but also results in a sense of
discrimination and heart burn among companies belonging to the
same industry. The Group further noted that selective coverage
within a particular industry does not give any major advantage
even to the Government for carrying out anti-dumping studies,
tariff related studies, pricing studies, anti-competitive studies,
subsidy related studies, sectoral studies or economic analysis,
etc. for the simple reason that fully representative data of the
industry is not available. In this regard, the Expert Group also
noted that the then Hon’ble Finance Minister of India, Shri T.T.
Krishnamachari, in 1965, had very clearly supported the view
that when we would have sufficient number of cost accountants
in the country (presently there are nearly 45,000 cost accountants
in India), every producing/manufacturing company shall be
covered by the mechanism of cost accounting records and cost
audit. Keeping the aforesaid in view, the Group recommends that:
(a) The existing practice of a company covered under section
209(1)(d) of the Companies Act, 1956 and not covered
under section 233B (except medium size companies that
would be required to maintain cost accounting records
but have been recommended for exemption from cost
audit) should be discontinued;
(b) All companies should be asked to furnish information,
either in Form 23AC (relating to e-filing of Balance
Sheet) or in Form 23ACA (relating to e-filing of Profit
& Loss Account), whether the company is covered under
section 209(1)(d) of the Companies Act, 1956 relating to
maintenance of cost accounting records;
(c) Cost audit orders under section 233B of the Companies
26
Act, 1956 should be issued on all such companies that
are not specifically exempted; and
(d) MCA-21 data should be used to identify such companies.
The Group has already recommended that all micro, small
and medium size companies, engaged in the production,
processing, manufacturing or mining activities, having
investment in plant & machinery up to Rs.10 crore and annual
turnover up to Rs.50 crore in the immediately preceding
accounting year, subject to certain conditions, should be
exempted from the provisions of cost audit under section 233B
of the Companies Act, 1956.
In addition, the Group recommends that other special
categories such as section-25 companies, companies limited
by guarantee and companies/ associations not for profit, except
those where any part of surplus income is allowed for
distribution among the shareholders, companies having their
total operations outside India, etc. should also be exempted
from the ambit of cost audit.
• As regards existing structure/contents/formats of the cost audit
report, as prescribed in the Cost Audit Report Rules, 2001
(amended in 2006), the Group concluded that the structure of
existing cost audit report requires complete modification. The
Expert Group further noted that all respondents, who participated
in the country-wide survey, have unanimously supported the view
that while there is strong need to continue with the cost audit
mechanism, especially for large size companies, the existing
formats need to be simplified. The respondents suggested a three
tier system viz. (i) a short report giving assurance to the
Institute of Cost & Works Accountants of India
stakeholders that organization has satisfactory Cost Management
practices, (ii) a more detailed report may be sent to Government,
and (iii) a very exhaustive report could be given to the company.
Keeping these issues in mind, the Group recommends as under:
(a) Existing concept of filing unit-wise and product-wise cost
audit report, introduced in 2001, should be dispensed
forthwith. Filing of minute cost details for each factory/
unit, within a factory/unit for each product, and within
a product for each type/variety/descripttion separately
and all complexities in reporting have to be avoided. The
revised structure should do away with providing detailed
cost statements of individual products since the same
compromises with the confidentiality and competitive
edge of individual companies;
(b) Existing Cost Audit Report Rules, 2001, as amended in
2006, containing very detailed and complex reporting
formats should be replaced with the new Cost Audit
Report Rules, 2008;
(c) Only abridged statement containing product group-wise
cost statements along with cost auditor’s report should
be filed with the Government. All other cost details,
statements, schedules, etc. should remain with the
company; and
(d) Cost auditor should submit detailed unit-wise and
product-wise cost statements, duly certified by him, to
the company, which may be called for by any
Government agency and/or regulator depending upon
the need.
28
(e) A sample copy of modified Cost Audit Report Rules,
containing modified Form-I & other formats is enclosed
as Annexure-XVIII [Page 620 of the Expert Group
Report].
• Having recommended submission of product group-wise cost
statements (instead of unit-wise, within a unit for each product,
and within a product for each type/variety/descripttion separately),
the Expert Group felt necessity to define the term “product group”
that can be universally understood and used by all industries/
companies and cost auditors, without any ambiguity. Accordingly,
the Groups recommends as under:
(a) Product Group means a group of homogenous and alike
products, produced from same raw materials & by using
similar or same production process, having similar
physical/chemical characteristics & common unit of
measurement, and having same or similar usage/
application;
(b) Product Group can be considered as an alternate to
“product family”. However, it cannot be considered as
an alternate to the term “business segment” or
“geographical segment” or “reportable segment” as
defined in the Accounting Standard 17 for the purposes
of reporting segment-wise financial results;
(c) ICWAI should issue a Guidance Note on the subject
within a period of three months, in consultation with
national level industry associations; and
(d) For the time being, the companies may be left free to
Institute of Cost & Works Accountants of India
correctly interpret the term “product group”, in
consultation with the cost auditor, as best suited to their
product range.
• The Expert Group noted that the requirements of cost data/
information by various regulators, user ministries/departments,
financial institutions & Banks and other government authorities
differ depending upon their purpose. Presently, they seek such
details from the cost audit reports filed with MCA. In addition,
few regulators have also prescribed their own formats seeking
requisite cost details from the concerned companies. The Group
feels that meeting with the need & requirements of all such
organisations from the same cost audit report would make it too
complex and unwieldy and also all companies would be
unnecessarily forced to give such data/information. Therefore,
as opined by all stakeholders/interest groups and recommended
by Working Group-III, the Expert Group recommends that:
Apart from using the data/information available in the
(modified) cost audit reports e-filed with MCA, all Regulators,
user Ministries/ Departments, Financial Institutions/Banks
and other Government Authorities may be left free to directly
seek such additional cost details from the concerned
companies, as may be required by them based on legal/quasi
legal requirement as mandated under their respective statutes.
• The Expert Group noted that, as per existing provision of CARO,
the [statutory] auditor(s) of the company appointed under section
224 of the Act, are required to include a statement in their Audit
Report whether requisite cost accounts and records, as prescribed
by the Central Government, have been made and maintained. In
this regard, the Group observed that (a) it is not correct to seek
30
such a statement from the financial auditor(s) of the company
who, as per the Chartered Accountants Act, 1949, are not
practicing in the field of cost accountancy; (b) the auditor(s) in
their statement further add “We have not made any detailed
examination of these records with respect to their accuracy and
completeness”, thus, such a certificate does not serve any
meaningful purpose; (c) in many cases, the certificate provided
by the auditor(s) is not correct and there is no mechanism in the
Government to verify its correctness; and (d) in the changed
principle based mechanism, adherence to CAS can be ensured
by members of ICWAI. Ministry of Corporate Affairs, in their
internal Policy Guidelines framed in 2006, also said that the
existing system of compliance by Statutory Auditors under CARO
should be reviewed periodically. In view of above, the Working
Group recommended that:
The existing provision of a Statutory (Financial) Auditor’s
certificate under CARO certifying maintenance of cost records
by the company should be discontinued. The Expert Group
endorses this and recommends for immediate implementation.
• On the issue of appointment of cost auditors, the Expert Group
noted the Irani Committee’s recommendation that “Government
approval for appointment of Cost Auditor for carrying out such
Cost Audit was also not considered necessary”. Further, in the
survey done, there was no consensus among the respondents.
Among the important ones, SEBI, CCI, CERC, ICSI, Chief
Adviser Cost, and ICWAI Council, all are in favour of
appointment of cost auditors by the shareholders in AGM.
Contrary to this, the CII has said that the Board of Directors of a
company without seeking any prior approval from the Central
Government (i.e. MCA) and the same be reported in the Directors’
Institute of Cost & Works Accountants of India
Report to the shareholders. The Expert Group has deliberated
upon this issue and opines that:
Transparency, accountability as well as independence of the
cost auditor are very important determinants of good
enterprise governance, and therefore, shareholders should be
given the right to appoint cost auditors and have the cost
auditor’s report for better evaluation of the company’s
performance & risk management. However, until such time,
it is decided to share any part of the cost audit report with the
shareholders, the appointment of cost auditors by the
shareholders is not practicable and hence the Expert Group
suggests that this issue may be examined separately.
However, to begin with, the shareholders must know that their
company is covered by the cost audit mechanism. Therefore,
the Expert Group endorses the recommendation of the Working
Group that the cost auditors should be appointed by the Board
of Directors of a company without seeking any prior approval
from the Central Government (i.e. MCA) and reports the same
to the shareholders in the Board of Directors’ Report.
• The Working Group-III, in its report, recommended that in order
to ensure transparency, efficiency, and credibility of the systems
followed by the company and also to ensure better compliance,
companies should be encouraged to rotate cost auditors after every
3-5 years. In this regard, the Expert Group noted that such a
provision for rotation of auditors neither exist in the Indian laws
nor found in any other country. However, a voluntary & healthy
practice of rotating the lead auditors does prevail in many large
size multinational companies. Therefore, the Expert Group
recommends that:
32
Indian companies should also follow this healthy practice of
voluntarily rotating the cost auditors after every 3-5 years.
• The Expert Group noted that as per provisions of section 233B of
the Companies Act, 1956, only Cost Accountants within the
meaning of the Cost & Works Accountants Act, 1959 can be
appointed as cost auditors. However, in the proviso to sub-section
(1) of section 233B, even Chartered Accountants possessing the
prescribed qualifications may also be appointed to conduct the
audit of the cost accounts of companies. The Group noted that
the number of qualified cost accountants has touched nearly
45,000. Hence, continuation of this proviso in the present
circumstances is not relevant. Therefore, the Group recommends
that:
The existing proviso under sub-section (1) of section 233B of
the Companies Act, 1956 may be deleted.
• Regarding periodicity of cost audit, the Expert Group noted that
the majority opinion is in favour of annual audit only. Few
companies and regulators have suggested half-yearly or quarterly
audit or limited review may be in case of listed companies. The
Group further noted that on this issue, SEBI has said that in case
of listed companies, it may be quarterly linked with the corporate
governance and segmental reporting in line with requirement of
quarterly reporting of financial results and in case of unlisted
companies, it may be yearly. The ICWAI Council in their reply
has said that the real assessment of the improvement in
performance or otherwise can be judged only when there is a
trend analysis over the quarterly reporting system is done.
However, Cost Audit should be conducted annually irrespective
Institute of Cost & Works Accountants of India
of whether it is a listed company or not. A limited review of key
parameters that appear in the cost audit report should be considered
by the Audit Committee on a quarterly basis for listed companies.
In view of this, the Expert Group recommends that:
As at present, periodicity of cost audit should remain on
annual basis. In addition, the Group recommends quarterly
internal audit of cost records.
The Group further recommends that the possibility of
introducing quarterly limited review of cost details, in case of
listed companies, may be examined in consultation with SEBI.
• On the issue of sharing any part of cost management trends/
information/data with the shareholders, the Expert Group noted
that there was no consensus among the different stakeholders/
interest groups. On this issue, CII has said that the cost
management trends may form part of the “Management
Discussion & Analysis” part of the Annual Report as currently
also done by many companies. The ICWAI Council has said that
as part of good corporate governance practice, data should be
shared with the shareholders. However the data once shared,
becomes public information and cost data is sensitive in the
competitive environment and therefore, it is proposed that keyperformance
indicators may be shared with the shareholders in
the Annual Report. SEBI said that the possibility of circulation
of cost auditor’s report along with important efficiency parameters
and also the suggestions made to the shareholders may be
explored. Like this, varied suggestions were made, which were
evaluated by the Working Group. After evaluating the pros &
cons, the Working Group-III recommended that:
34
Circulation of selected information to the shareholders of the
company, containing cost trends, key performance indicators,
risk assessment or key risk indicators, CSR details, trends or
factors like external economic conditions and internal
efficiency, etc., as part of the management analysis section of
the annual report to meet with the overall objectives of good
corporate governance, should be left to the discretion of the
management.
ICWAI should work out a model format in consultation with
SEBI. This would align with the findings of IFAC survey on
external financial reporting. The Expert Group endorses this.
The Expert Group also recommends that in line with the
earlier issue of appointment of cost auditors in the AGM, this
issue may also be re-examined separately.
COST ACCOUNTING STANDARDS
• In order to promote uniformity & consistency in the preparation
and presentation of cost statements under different statutes and
under WTO, there is an urgent need to integrate, harmonize and
standardize the cost accounting principles and practices. Further,
the Expert Group has recommended complete shift for
maintenance of cost accounting records by the corporate sector
from the existing rule/format based mechanism (that is backed
by Cost Accounting Records Rules notified by the Government
for each industry separately) to a principle based mechanism (that
should be backed by the cost accounting standards and generally
accepted cost accounting principles & practices). Hence, the
Group recommends:
Institute of Cost & Works Accountants of India
Issue of Cost Accounting Standards based on the generally
accepted cost accounting principles & practices presently
followed by the industries in India.
All the Cost Accounting Standards (CAS) issued/to be issued
should be aligned with the following key objectives:
›
in manufacturing, process or service industry;
›
principles and practices;
›
consistency in classification, measurement, assignment and
allocation of costs to products and services;
›
activity or service where required by legal or regulatory
bodies;
›
Accounting Standards in the matter of attestation of General
Purpose Cost statements; and
›
related issues by various user organisations, government
bodies, regulators, research agencies, academic institutions,
etc.
• In the area of Cost Accounting Standards, all other
recommendations made by the Expert Group are as under:
36
›
restructured as per this revised framework and re-issued.
›
should be done in consultation with the concerned legal and/
or statutory authority in the government so that the
adoptability of use of these revised standards by such
organisations is not disturbed.
›
Application Guidance Note for each Cost Accounting
Standard. The application guidance note should provide the
explanatory notes and interpretations of various
terminologies and methodologies referred to in the cost
accounting standards with suitable illustrations and formats
for presentation of cost statements.
›
already identified.
›
common areas already included in the list of 39) that are of
use by the infrastructure or service sector companies.
›
ICWAI should also follow the same process and issue the
Cost Accounting Standards in consultation with all
stakeholders viz. industry associations, companies,
government organisations, regulatory authorities, user
agencies, professional bodies, professional accountants in
public practice, professional accountants in business, etc.
Institute of Cost & Works Accountants of India
›
harmonization between the Cost Accounting Standards and
Financial Accounting Standards.
›
consultation with the Accounting Standards Board of ICAI,
should prepare a list of such items which need harmonization
in two sets of standards i.e. Accounting Standards and Cost
Accounting Standards and update the list periodically.
›
treatment based on cost accounting principles, the Group
recommends that any divergence should be disclosed as
reconciliation between the Costing Profit & Loss Statement
and Financial Profit & Loss Statement.
›
reviewed and aligned with the relevant issues in IFRS.
›
incorporate the best practices enshrined in the Cost
Accounting Standards issued by different countries.
›
enshrined in the current International Good Practice
Guidance and the Management Accounting Guidelines
issued earlier by International Federation of Accountants
(IFAC).
›
similar body be set up advising the Central Government on
the formulation and laying down of cost accounting policies
38
and standards for adoption by companies or class of companies
under the Act. The Group further recommends that till such
time, the cost accounting standards issued by ICWAI may be
recognised as that prescribed by the Central Government.
CONFIDENTIALITY OF COST DATA
& COST OF COMPLIANCE
• On the twin issues of “confidentiality of company cost data” and
“cost of compliance”, Expert Group has noted the following key
observation made by the Working Group-IV:
“The Expert Group in its initial proposal has suggested many
radical changes in the existing mechanism. These measures,
if finally recommended and implemented, would go a long
way in meeting with the concerns of the companies/industry
associations on confidentiality of cost data and considerably
reduce the cost of compliance.”
• Keeping in view (a) the concerns expressed in the past by various
companies and industry associations on these twin issues; (b)
the observations/suggestions/recommendations made by the
Working Group-IV; and (c) the opinions expressed by various
stakeholders & interest groups in the replies sent to the
questionnaire and those expressed in various open-house
consultative meetings; the Expert Group opines/recommends
that:
After implementation of various recommendations made by
the Expert Group for revised mechanism/framework of cost
accounting records, cost audit and reporting in the corporate
sector, no further steps are required to ensure complete
Institute of Cost & Works Accountants of India
confidentiality of company cost data and there would be
substantial reduction in the cost of compliance to the
companies.
GOVERNMENT ORGANISATIONS
AND SERVICE SECTORS
• The Expert Group noted that after liberalization, the services sector
has grown steadily and is accounting for 55% of the GDP
compared to 27% of the industrial sector, out of which only 17%
is by the manufacturing sector, which has relatively shown less
growth. This has assumed greater importance after WTO has
replaced the concept of GATT to GATIS encompassing vital
service activities like Finance, Energy, Health, Education, etc. It
is imperative that at this stage itself, a system of cost consciousness
is created in these sectors so as to maintain efficiency, performance
and propriety in their operations to be competitive with larger
players entering these sectors from developed countries with
greater resources and better efficiency of operations.
• The Expert Group further noted that given the enormous amount
of resources required for the economic development and the fact
that there is hard pressure on the availability of resources, it is
very essential that the cost of resources used in all economics
units are subjected to systematic accounting procedures and
subjected to professional accreditation. The relationship between
the input and output, in any economic activity, is traditionally
upheld to develop Benchmarks for performance measurement and
this input-output relationship has to be examined in all economic
activities. This has to be done in a systematic manner so that the
data is used for various policy decisions. Cost Accounting is one
time-tested system of building input-output relationships.
40
• The Group noted the observations/recommendations made by the
Committee on Subordinate Legislation (Fourteenth Lok Sabha)
in its First Report submitted on 2nd December, 2004. The
Committee said that service sectors such as Banking, Insurance,
Health Services, Education, Hotel, etc. have admittedly “attained
strategic importance to the economy and the public at large,
particularly after opening up of the economy for private/foreign
companies” and an authentic cost data base is of paramount
importance to various existing and new regulatory bodies,
Competition Commission and Government Departments for
fixation of user charges in respect of services provided by them
and would go a long way in fulfilling their respective objectives.
• The Group further noted that education & research services,
healthcare services, municipal services, social security services,
public procurement, defence procurements, public supply
contracts, public-private partnership contracts, toll roads/bridges,
railways, postal authorities, telecommunication services,
electricity generation & distribution, state asset administration,
financial services, tourist services, environmental effects’ costing,
social pricing of goods, cross-subsidization impacts, pricing of
agriculture inputs & outputs, etc. are major governmental and
service sectors, across the globe, using cost accounting principles
& practices.
• It was noted that as per IFAC, general principles of costing, design
of costing systems and the cost information are important drivers
of performance information and reporting in public and not-forprofit
organizations. Even though cost accounting is today more
of a management than an accounting exercise, IFAC believes that
government financial officers and accountants have important
leadership roles to play. They can provide much of the stimulus
Institute of Cost & Works Accountants of India
and knowledge needed to develop and implement cost accounting.
• Further, the Expert Group noted that there was a general consensus
among all the respondents that cost consciousness is important
in all sectors of economy and even more important in noncompetitive
public services. Similarly, everybody agreed that all
Government/public agencies should determine user charges for
utilities and services based on most efficient costs. CII said that
the cost accounting and cost audit framework must be extended
to various government projects wherein the public spending is
involved; all public service organisations should determine user
charges based on most efficient cost. ICWAI Council said as the
service sectors and other social sectors play a huge role in the
national economy, these sectors should be mandatorily required
to maintain structured cost accounting systems. Further, the
infrastructure sector which includes roads, seaports, airports,
railways, telecom, power projects, industrial parks, urban
infrastructure, exploration, refining, mining, etc. is the backbone
of the growth of any country. It is therefore felt that infrastructure
sector needs to be included under the provisions of cost accounting
and cost audit. Keeping the aforesaid observation in view, the
Expert Group recommends as under:
(a)
healthcare, education, banking, insurance, financial
services, transportation, information technology, public
utilities & essential services such as municipalities,
electricity, water supply, city transport, etc. should be
brought under the mandatory mechanism of cost
accounting and cost audit.
42
(b)
and cost audit should also be extended to various
Government projects/schemes, departmental
undertakings, such as ordnance factories, railway
locomotive/coaches manufacturing units, etc. and all the
Government contracts and procurements should be
covered forthwith.
(c)
roads, seaports, airports, railways, telecom, power
projects, industrial parks, urban infrastructure,
exploration, refining, mining, etc. are backbone of the
growth of any country; hence needs to be included under
the provisions of cost accounting and cost audit.
(d)
charges based on most efficient costs. Subsidies meant
for the poor may be decided after being fully aware of
the opportunity cost, social factors and the shadow price.
Even where cross-subsidization is necessary, it should
be transparent and made known to the public at large.
(e)
presently either operate as extension of Government
ministries/departments or are governed by various
Central/State Government statutes and/or resolutions.
These are operated in both the corporate form as well
as non-corporate form of organisations. In all the noncorporate
and/or not-for-profit organisations, the
existing principles & practices of cost accounting and
cost audit may be extended by the respective authorities
by suitably amending their laws/statutes.
Institute of Cost & Works Accountants of India
(f)
in the Ministry of Finance should take a lead role to
spearhead the process of inculcating cost accounting
systems in all these organizations/entities.
(g)
should play a supportive role in (a) evolving suitable cost
accounting systems; (b) issue of relevant cost accounting
standards & guidance notes; and (c) in undertaking
training of human resources in such organizations
(h)
Accountant Generals, in consultation with the
Comptroller & Auditor General of India, should take a
lead role in (a) modifying the existing budgetary system
of the Central/State Governments; (b) recasting the
outcome budgets by correctly evaluating the costs &
benefits of each program/activity; and (c) improving the
public information system.
44
COMPANIES BILL, 2008
• The Expert Group noted that the provisions contained in the
proposed Companies Bill, 2008 are not entirely in conformity
with the various recommendations made in this Report. The
modified structure/framework recommended by the Expert Group,
if accepted, would entail restructuring of the proposed provisions.
These are briefly enumerated in the ensuing paragraphs.
• The Expert Group has recommended widening the scope of
maintenance of cost accounting records and cost audit framework
to all companies (except certain exempted categories) in a phased
manner. Accordingly, it is not necessary for the Central
Government to restrict its enabling powers under sub-section (1)
by restricting the same to “class of companies” engaged in only
production, processing, manufacturing, mining or infrastructure
activities. Therefore, the Expert Group suggests that the provisions
under sub-section (1) should not contain the words “engaged in
production, processing, manufacturing, mining or infrastructure
activities” and under the modified provisions of sub-section (1),
the Central Government would be free to decide prescribing
maintenance of cost accounting records in any “class of
companies” as the situation prevailing in the economy.
• Alternatively, as in the case of maintenance of financial records,
the Central Government may seek an enabling power to exempt
any company or class of companies from the maintenance of cost
accounting records and widen the scope of sub-section (1) to all
class of companies.
• The Expert Group has recommended shifting maintenance of cost
accounting records from a rule based mechanism to a principle
Institute of Cost & Works Accountants of India
based mechanism based on the cost accounting standards issued
by ICWAI. The proposed provisions of the Bill need suitable
modification to incorporate adherence to cost accounting
standards by all companies maintaining cost accounting records,
either under sub-section (1) or under sub-section (3).
• The Expert Group has recommended that once a company falls
within the purview of maintenance of cost accounting records, it
should submit either a compliance report (in case of medium sized
companies) or submit a cost audit report to the Central
Government. Accordingly, the proposed provisions under subsection
(2) would require modifications by making it obligatory
for all such companies covered under sub-section (1) to get their
cost records audited by a cost accountant and submit the report to
the Central Government as specified in sub-section (6). There
would be a necessity to add a proviso to sub-section (2) to enable
medium sized companies to file only a compliance report in such
manner as may be prescribed.
• In line with the recommendations made by the Expert Group, it
is necessary to make a suitable provision in the Bill to disclose
the particulars of cost auditors in the Board of Directors Report.
• In view of the recommendations made above, the provisions of
sub-section (3) would not be required.
• Other modifications in the proposed provisions would be required
in line with the analysis made above.
46
NOTE
On various recommendations made by the Expert Group,
Ministry of Corporate Affairs has sought suggestions/
comments from all stakeholders, within 90 days from 24th
March, 2009. The Council of the Institute intends to send its
views/suggestions on this Report to the Ministry of Corporate
Affairs. It would be very much appreciated if members
desirous of expressing their views on the Report send their
views/suggestions to the Institute. These would be
consolidated and after discussion in the Council, sent to the
Ministry of Corporate Affairs. Names of the respondent
members would also be displayed. You can send your views/
suggestions to:
Mr. J. P. Singh,
Director (Technical),
Institute of Cost and Works Accountants of India
ICWAI Bhavan,
3 Institutional Area,
Lodi Road, New Delhi – 110 003.
Or
Send email at
technical.jps @ icwai.org, preferably on or before 15th May 2009.)
THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA
(A Statutory Body under an Act of Parliament)
12, Sudder Street, Kolkata - 700 016
REPORT OF THE EXPERT GROUP TO REVIEW
THE EXISTING COST ACCOUNTING RECORDS
RULES, COST AUDIT REPORT RULES
&
COST ACCOUNTING STANDARDS – A BRIEF
CONTENTS
SI. Contents Page
No.
1. CONSTITUTION OF THE EXPERT GROUP 1-2
2. KEY ECONOMIC ISSUES 2-8
Competitiveness of India Inc 2
Regulatory Framework 7
3. CONSULTATIONS WITH STAKEHOLDERS 8-9
4. INTERNATIONAL FEDERATION OF
ACCOUNTANTS (IFAC), GLOBAL
COST ACCOUNTING PRACTICES AND
THE MATURITY MODEL 10-13
5.
6. AUDIT OF COST ACCOUNTING RECORDS 22-34
7. COST ACCOUNTING STANDARDS 34-38
8. CONFIDENTIALITY OF COST DATA
& COST OF COMPLIANCE 38-39
9. GOVERNMENT ORGANISATIONS
AND SERVICE SECTORS 39-43
10. COMPANIES BILL, 2008 44-45
11. Note 46
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