ebulletin final march18 · (i) contingent contract a “contingent contract” is a contract to do...

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VOL: 3, No.: 3 , March , 2018 ISSUE

CMA STUDENTS’

FINAL

TOLL FREE 18003450092 / 1800110910

Behind every successful business decision, there is always a CMA

Chairman,Training & Education Facilities (T& EF) Committee

The ChairmanMessage from

CMA Manas Kumar ThakurCMA Manas Kumar ThakurCMA Manas Kumar Thakur

STUDENTS’ E-bulletin MARCH 2018, ISSUEFinalVOL: 3, No.: 3

Behind every successful business decision, there is always a CMA i

CCCOOONNNTTTEEENNNTTTSSSTTTCCCOOONNN EEENNNTTTSSSKnowledge Update -

Message from the Chairman -

Submissions

Practical Advice

Examination Time Table

Message from the Directorate

Snapshots

Leadership Matrix

of Studies

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Group : III Paper 13: Corporate Laws

Group: III Paper 15: Strategic Cost Management - Decision Making (SCMD) - Group: III Paper 16: Direct Tax Laws and

International Taxation (DTI) -

Group: IV Paper 17: Corporate Financial Reporting (CFR) -

Group: IV Paper 18: Indirect Tax Laws & Practice (ITP)

Group: IV Paper 19: Cost & Management Audit (CMAD)

Group: IV Paper 20: Strategic Performance Managementand Business Valuation (SPBV)

Group: III Paper 14: Strategic FinancialManagement (SFM) -

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8

11

15

19

23

27

35

34

31

36

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& Compliance (CLC) -

In this section of e-bulletin we shall have a series of discussion on each of these chapters to provide a meaningful assistance to the students in preparing themselves for the examination at the short end and equip them with sufficient knowledge to deal with real life complications at the long end.

KNOWLEDGEKNOWLEDGEKNOWLEDGEUpdateUpdateUpdate


Behind every successful business decision, there is always a CMA 1

Your Preparation Quick Takes

GROUP: 3, PAPER: 13

CORPORATELAWS & COMPLIANCELAWS & COMPLIANCE (CLC)(CLC)LAWS & COMPLIANCE (CLC)

Shri Subrata Kr. RoyCompany SecretaryM.S.T.C. Ltd.He can be reached at:[email protected]

C 20%

A 50%B 30%



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Learning Objectives:

Read the Study Material minutely.

For details or if you don't understand Study Material or the section is important to identify the

topic, then refer to Bare Act, otherwise reference to Bare Act is not necessary. For Company Law,

book by Avtar Singh is recommended. For other laws Institute Study Material is sufficient.

The words used in any of the texts as mentioned above should be understood by immediate

reference to the Dictionary.

The main points coming out in any of the provisions should be either underlined or written in

separate copy which has to be repeated again and again.

Theoretical knowledge should be adequate and clear before solving practical problems.

Don't write wrong English. It changes the meaning and therefore answer may be wrong even when

the student's conception is clear. Also don't make spelling mistakes.

Meaning of Contract

A. Contract is an agreement or a promise enforceable by law creating an obligation of parties to do or not to do anything. Mere contract to make a contract is not a contract.

B. Contract can be either implied or expressed. In implied contract the conduct of the parties satisfies that one party is making an offer and the other party is accepting it. agreed place. Contract, therefore would comprise (i) agreement and (ii) legal obligation i.e. the agreement should be enforceable by law.

AgreementA. When two or more persons meet upon a common purpose and consent to do or refrain from doing anything, it will be called an agreement. Person can be a natural person or juristic person. In all agreement there is an obligation, which means duty to do or abstain from doing what one has promised to do or abstain from doing.

The act defines “every promise and every set of promises

forming the consideration for each other, is an agreement”

Legal obligationIt is said that all contacts are agreements but all agreements are not contracts. This means that in order to be a contract there must be more then mere agreement. These are legal enforceability and consideration. Legal enforceability means that the contract, if not fulfilled should have legal consequences and parties to the contract should be aware of it. Consideration is the price which the other party agrees to pay to the person who performs the contract. This is to differentiate those agreements which are not legally enforceable, i.e. agreeing to go to some social/ religious function.

'promisor', 'promisee' and 'promise'.A. Person making the proposal is called promisor and the person accepting the proposal is called promisee. The subject matter of the proposal is called promise. Person making the promise is also called offeror and the promissee is called offeree and promise is called offer.

Agreements not contracts

The following agreements are not contracts.

(i) Agreement relating to social matters.(ii) Domestic arrangements between husband and wife.

Essentials of a valid contractA. The essential of a valid contract are as follows:

(i) There has to be an offer by Offer and acceptance. other promisor to be accepted by other person, i.e. promisee. Both offer and acceptance should not suffer from illegality.

It has been scitifically established that thereiisatime lag between making an offer nad acceptance of the offer.if a person having a plot of land offers it to someone he becomes the offerer and the the other person becomes the oferee or promisor nad promise repectivley. If the buyer offers to buy by offering a price, he becomes the offerer. Offer once accepted becomes a contract.

(ii) Contract is voluntary Free consent of parties.agreement by parties and the consent should be free and genuine. No body can force other party to make a contract. Parties should agree upon the same thing in the same sense. Consent shall be said to be free if it is not caused by (1) coercion, (2) undue influence, (3) fraud, (4) misrepresentation & (5) mistake. These terms are discussed further at later stage.

(iii) Intention to create legal relations or an intention to have legal consequences.The parties should know that by contracting, a legal relationship is being created and they have to face the consequences for non-performance of the contract. parties should not have feeling that if I di not operform nothing will happen under law. Contract is a kind of commitment and contracting paries cannot comeopout of the commitment at sweet will of either of the party.

(iv) there shuld a Legal object not opposed to public policy- the object and subject matter of the contract should be lawful i. eshould not be against law and neither can be against the public policyi. E. Govt. Policy.

(v) means any price either in Lawful Consideration–cash or kind, which the promisee has to pay to the promisor for performance or non-performance as per mutual agreement

(vi) contract shuld be always inter Competent parties–vivos .i. e between two living persons. Any living persons incuddingartifical, persons can contract

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unless should not be barred by contract law or any other law or by court order to enter into contracts or conitinue with a contract already made.

(vii) There should Terms of the contract are certain.not be any ambiguity or vagueness in terms of the agreement; otherwise it would lead to confusion regarding subject matter of contract.

(viii) the terms and Possibility of performance:conditions of the contract should be technically possible to comply.

Types of contract

(a) Void contract: means a contract which suffers from any shortfall which is essential to a contract. Therefore such contacts shall not legally enforceable and considered to be non-existent.Some of contracts have been Expressly declared void under the law. They are:

(i) contract in restraint of marriage(ii) contract in restraint of trade(iii) contract in restraint of Legal Proceedings(iv) Uncertain Agreements: terms and conditions are

uncertain and unclear so far performance and other parameters are concerned.

(v) Wagering Agreements: contracts of betting and gambling.

(vi) Agreements contingent on impossible acts: some performance which depends on issues which are impossible.

(vii) Agreements to do impossible Acts. Here there is something which is naturally impossibleand something which is technically impossible.

(b) Valid contacts: contract having all the essentials of a valid contact shall be considered valid in law.

(c) Voidable contract: when a contract suffers from certain irregularity, one of the parties may have the intention to condone that irregularity and consider the contract as valid. Alternatively, the party may choose to make the as void. Agreement becomes enforceable at the option of one of the parties.

(d) Unenforceable contract: contract otherwise valid is not capable of being enforced in a court of law, because of some technical grounds.

(e) Illegal and unlawful contract: contrary to law.(f) Express and implied: when terms of contract or

principal terms are discussed before hand it is called express. If parties behave in amanner that there is contract even without talking it is implied.

(g) A bus is running on particular route and you get into it, there is implied contract between the passenger and the bus that it will go in particular direction and the passenger has to pay.

Quasi contract: sometimes people behave in a manner which shows that there is relationship in the nature of the contract. Certain relationship resembling those created by

contract . There may not be any contract existing. Suppose your friend is passing through financial distress and you pay some payments to third party on his behalf. You are supposed get back though you have not made any contract to lend your friend.

Supplies necessities to a person even when he does not want that but accepts the supplies is an example for quasi contract.

There may be situation where one party supplies the other party or his dependents any essential thing; this will amount to quasi contract. Similarly a person, who is interested in the payment of money, which another is found by law to pay and who therefore pays it, is entitled to be reimbursed by the other. Obligation delivers anything to other person or his dependents; the later is found to make compensation

Illegal agreementA. An illegal agreement is one, which, like the void

agreement has no legal effect as between the immediate parties, but has the further effect that transactions collateral to it become tainted with illegality and are therefore not enforceable.

(h) Executed: parties have signed and executory: one of the part yet to sign

(i) Contingent contract

A “contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.

i) A contingent contract cannot be enforced by law until and unless that event has happened and in case the event becomes impossible, such contracts become void.

ii) A contract contingent upon not happening of an event can be enforced only when the event becomes impossible.

iii) A contract contingent on lapse of time can be enforced if at the expiration of the time fixed such event has not happened or before the time fixed the event becomes impossible.

iv) Contingent contracts to do any thing if an impossible event happens are void.

valid contracts transforming into void contract.Sometimes a contract was legally valid at the time it was made, but subsequently with the change of situation, it may turnout to be non-operative.

(i) Subsequent illegality(ii) Performance becoming impossible due

change in situation(iii) it is proved that the contract was made with

coercion, undue influence.(iv) In case on contingent contract, when the event

on which the subject mater of the contract depends has become virtually impossible.

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GROUP: 3, PAPER: 14

STRATEGICFINANCIAL MANAGEMENTFINANCIAL MANAGEMENT (SFM)(SFM)FINANCIAL MANAGEMENT (SFM)



Dr. Arindam DasAssociate Professor,Department of CommerceThe University of BurdwanHe can be reached at:[email protected]

A 25%B 20%

C 25% D 30%

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Learning objectives:

After studying this section on Strategic Financial Management, you will be able to:

understand the concept of financial derivatives

cognize the features of financial derivatives

know the contributing factors for the development of financial derivatives

explain the uses of financial derivatives

Strategic Financial Management

Introduction

Derivative is an instrument or contract whose value is derived from the value of one or more basic variables, technically called underlyings, i.e. it

doesn't have any independent value. The underlyings may vary from the price of hogs to the amount of snow falling at a certain ski resort and for example, it may be commodities (e.g. rice, potato, etc.), financial instruments (e.g. currency, interest rate, securities, stock index, etc.), real assets (e.g. gold, bullion, etc.), live stocks, weather, energy or anything else. Accordingly, derivatives are classified as commodity derivatives, financial derivatives, and so on. Broadly there are four techniques in each class of these derivatives – forward, futures, option and swaps. The concepts regarding forward, futures, option and swaps do not change with the change in the underlyings. Alternatively, the underlyings are immaterial for understanding these concepts. When any one of these techniques is applied to a particular underlying, it becomes a derivative product, like interest rate forward, index futures, stock put option etc.

Features of Financial DerivativesA financial derivative is a financial instrument whose value is derived from the value of another financial instrument(s). Derivatives have been included in the definition of securities in Securities Laws (Second Amendment) Act, 1999 in India and Securities Contracts (Regulation) Act, [SC(R)A] defines “derivative” to include - (a) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (b) a contract which derives its value from the prices, or index of prices, of underlying securities”. Accordingly, derivatives are securities under the SC (R) A and the trading of derivatives is governed by the regulatory framework under the SC (R) A.The basic features of a financial derivative instrument may be stated as follows:

(i)� A financial derivative instrument relates to the future contract between two counter parties and the value of such instrument is derived from the value of another financial instrument.

(ii) � The financial derivative contracts can be undertaken either as over the counter (OTC) products or as Exchange traded products.

(iii) � Financial derivatives may be price fixing products like forwards, futures, FRAs and swaps on different financial instruments and price insurance products like options on various financial instruments.

(iv) � The financial derivatives are also known as off-

balance sheet items as their value is not directly ascertainable, which in turn is based on the value of the underlying and no asset or liability underlying the contract is put on the balance sheet as such.

(v) � All financial derivative instruments have a pre-determined finite life at the end of which they expire and generally involve small payments in comparison with the notional principal amount of the transactions.

(vi) � The financial derivatives are usually operated in a highly unstructured information environment and accordingly, independent judgment takes predominant role over objective rules in handling derivatives.

(vii) � All financial derivatives are the classic examples of zero-sum game. Whenever one party gains, the other party must lose i.e., if it has a positive value for one party, it must have the same negative value for the counterparty.

(viii) � The financial derivative products may be 'plain vanilla' type or 'exotic' type. A plain vanilla derivative product is a standard instrument with no usual features and is created by following anyone for the four basic techniques, namely forward, futures, options and swaps. The exotic derivative product is a non-standard instrument with usual pay-off mechanisms.

(ix) � The financial derivatives are very sophisticated as well as risky instruments as their prices are subject to substantial fluctuations and accordingly, it requires investment techniques and risk analyses.

Contributing factors for the development of financial derivativesFinancial derivatives have turned into a major icon in financial market since the early 1970s. The decade 1970s was a turning point in financial market because of two reasons. Firstly, the Bretton Woods system commonly known as fixed exchange rate regime, which had been operating since the 1940s, broke down in August 1971. Secondly, the monetarism took over from the keynesianism as the orthodoxy in monetary policy in the macro-economic thinking in the mid 1970s. These two developments established the backdrop in which financial derivatives could flourish and became a major force in world financial exchange market.

Apart from these factors, the volatility of the financial market also increased due to non-convertibility of dollar into gold at fixed rate in USA, the oil price shocks, excess government spending and inflation inducing policies, political changes leading to market oriented open economic system coupled with lifting of tariff barriers and exchange

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controls in several countries, etc.. Accordingly, financial derivatives got a momentum in order to reduce the increased volatility in the global financial market during this time.

Besides, advancement and improvement in information technology, transformation of the world into a 'global village' with the advent of cheaper communications, 24 hour global trading and on-line risk management system were the factors leading to the development of financial derivatives.

Last but not the least, from the 1970s onwards, risk management as a separate science came into finance theory, which brings about increasing professionalism amongst the market-players. The use of science and mathematics in conjunction with increased computing power triggered the birth of the financial engineering profession.

These aforesaid factors for the development and growth of financial derivatives significantly affect most of the developed countries in the world. Since 1991, due to globalization and liberalization of economic policy, even a country like India has also entered into an era in which Indian companies cannot ignore the changes in global markets. Accordingly, in India, financial derivatives have been introduced in a phased manner in the financial market.

Uses of financial derivativesSpecific uses of financial derivatives can be stated as follows:

(a) Financial derivatives can be used as risk

management tool. They are being widely used for

hedging by the financial institutions and also by

common investors. Generally, hedgers use

derivatives to reduce or eliminate the risk

associated with the expected unfavourable price

volatility of the underlying assets through risk-

sharing and risk-pooling mechanism. Arbitrageurs

can also take advantage of the derivatives through

offsetting positions if they see the futures price of an

asset getting out of line with the cash price.

(b) It also encourages speculators for enhancing

liquidity in the market. Liquidity refers to the

ability of market participants to transact quickly at

prices that are close to the true or fair value of the

asset and also the ability of buyers and sellers to

discover each other quickly without involving any

large premium or discount.

(c) It may be used to build up future prices of the assets

through rational expectations; i.e. it has a very

important role of price discovery which represents

to the market's ability to determine true

equilibrium prices by revealing of information

about future cash market prices through the futures

market.

(d)� The financial derivative instruments provide market completeness to a greater degree. A market would be said to be complete if instruments may be created which can, solely or jointly provide a cover against all the possible adverse outcomes, i.e., a complete market is a market in which any and all identifiable pay-offs can be obtained by trading the securities available in the market.

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GROUP: 3, PAPER: 15

STRATEGICCOST MANAGEMENT- DECISIONCOST MANAGEMENT- DECISIONMAKING MAKING (SCMD)(SCMD)COST MANAGEMENT- DECISIONMAKING (SCMD)



CMA (Dr.) Sreehari ChavaCost & Management Consultant,Nagpur, Maharastra,He can be reached at:[email protected]

B 50%

C 30%A 20%

A Cost Management 20%B Strategic Cost Management Tools and Techniques 50%C Strategic Cost Management - Application of Statistical Techniques in Business Decisions 30%

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The Strategic cost management framework provides a clear plan of attack for addressing costs and decisions that affect them. It helps to get answers on:

Is there a plan for strategic cost management?

Have the controlling functions for each significant cost in the organization been identified?

Are there resources devoted to finding or obtaining new approaches to breaking cost barriers?

Is cost modelling being used or is there an active effort to develop or buy cost modelling capability?

Socio Economic Cost Benefit Analysis

Socio Economic Cost Benefit analysis (SCCBA) is the predominant tool used in welfare economics in order to assess whether an intervention – be it a project or

policy – should be undertaken or not. It is an extension of Economic Cost Benefit Analysis, adjusted to take into account the full spectrum of costs and benefits, including social and environmental effects, borne by society as a whole.

Traditional Cost Benefit Analysis has tended to emphasise only the economic costs and benefits. Social and Environmental Costs and Benefits have often been treated as secondary considerations because projects are often driven by the economic imperative to generate jobs and growth. Gradually Socio Economic Cost Benefit analysis (SCCBA) has been evolved to cover the entire spectrum of individuals and communities.

The process of Socio Economic Cost Benefit Analysis may comprise of eight vital steps.

1. Identification of the Project

2. Technical and Demand Analyses

3. Financial Effects

4. Fiscal Effects

5. Externalities

6. Opportunity Costs

7. Economic Return on Investment (EROI)

8. Social Return on Investment (SROI)

Items 1 to 3 are part of the traditional Financial Analysis; Items 4 to 7 go beyond the private interests and look at the Economic Analysis; whereas item 8 moves forward and addresses the Social Concerns. Fiscal Effects refer to Fiscal Transfers and consist of the Fiscal Income such as Rates, Taxes and Other Duties that may be generated by the project as also the Fiscal Costs such as Subsidies and Incentives that may have to be extended to the project. Externalities refer to calculation of External Effects of the Project. Opportunity Costs refer to the Opportunity Costs relating to both the Inputs and Outputs wherein shadow prices are adopted if market prices are not available. EROI refers to computation of the Economic Net Present Value (ENPV) and the Economic Internal Rate of Return (EIRR). SROI recognises that economic, environmental and social outcomes are all critical factors in achieving quality lives and well-being and should be included in a 'Triple Bottom Line' approach.

In general, SECBA is used in the ex-ante evaluation for the selection of an investment project. However, it can also be used ex-post to measure the economic impact of an intervention. It is normally used for major infrastructure projects, especially in the transport and environment sectors, where it is easier to quantify and monetise the non-market effects. SECBA is also used to evaluate projects in the health, education and cultural heritage sectors.

In the context of Socio Economics, the term “Cost” is assumed to include “Pure Private Costs” that are enterprise centric and also the “Pubic Costs” that are community centric. Here, the concept of “Social Cost” is broadened to cover 'apparent' internalities which are private in nature plus the 'hidden' externalities that impact the community. In the process of decision making, the individual firm generally considers only that portion of the social costs, referred above as 'Pure Private Costs', that are born by it and tends to ignore the 'Public Costs' that are born by the external stakeholders.

There are three categories of these so-called 'externalities':

a. knock-on impacts which are tangible and have a

market value, e.g. the number of jobs that are

indirectly created or destroyed;

b. knock-on impacts which are tangible but do not

necessarily have a market value per se, e.g.

environmental pollution; and

c. knock on impacts which are neither tangible nor have

a market value, e.g. social well being.

Externalities could be positive or negative. For example, when a supplier of educational services indirectly benefits society as a whole but only receives payment for the direct benefit received by the recipient of the education: the benefit to society of an educated populace is a positive externality.If there is a positive externality, then one will have higher social benefits than private benefits. Environmental pollution is an example of a social cost that is seldom borne completely by the polluter, thereby creating a negative externality. If there is a negative externality, then social costs will be greater than private costs.

Be it a positive externality or a negative externality, the implication is that of inefficient allocation of resources. In either case, economists consider this as a market failure for the reason that in thecase of negative externalities, private agents will engagein too much of the activity; in the case of

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positive externalities, they will engage in too little. As a result, the marginal rateof transformation in production will not be equal to the in consumption due to theeffect of the externality and as a result marginal rate of substitution Pareto optimalitywill not occur thereby defeating the very objective of the welfare economics. Such a situation eventually leads to Government Interventions to facilitate better allocation and utilization of the resources.

In its initial stages, SECBA was originally developed as a technique of Social Cost Benefit Analysis in the 1960s in response to continuing demands on the State to build basic infrastructure. The technique was prompted by growing confidence in a mixed economy with associated widespread market prices, innovations in electronic data processing capacity, and shortage of investable savings and international purchasing power. In the late 1960s, Little & Mirrlees and UNIDO developed Social Cost Benefit Analysis techniques that gave answers to a number of technical questions in pricing costs and benefits. This gave economists the apparent power to make a comparative appraisal of any developmental activities against an international standard in terms of their net benefits to the global human condition.

“Socio Economic Cost Benefit Analysis” is that vital tool that can evaluate the Social Costs vis-à-vis the Social Benefits whereby efficient allocation of resources is enabled towards achieving maximum welfare of the Stakeholders. The analysis can be applied to both Public & Private Investments and Government Interventions could be poisoned as a preventive mechanism rather than being curative.The core fact is that SEBCA involves establishing the value of an activity from the public perspective; at its most ambitious this is a global perspective.

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GROUP: 3, PAPER: 16

DIRECT TAXLAWS AND INTERNATIONAL LAWS AND INTERNATIONAL TAXATION TAXATION (DTI)(DTI)LAWS AND INTERNATIONAL TAXATION (DTI)



CA Vikash Mundhra He can be reached at:[email protected]

A 50%C 20%

B 30%

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To develop basic idea about the problem of International double taxation

To get acquainted with the methods of reliefs

To have acquaintance with the basic provisions of the provisions of the Indian

Income-tax Act regarding reliefs for double taxation.

Equalisation Levy

Wi th the expans ion o f in format ion and communication technology, the supply and procurement of digital goods and services have

undergone exponential expansion everywhere, including India. The digital economy is growing at 10% per year, significantly faster than the global economy as a whole.

Currently in the digital domain, business may be conducted without regard to national boundaries and may dissolve the link between an income-producing activity and a specific location. From a certain perspective, business in digital domain doesn't seem to occur in any physical location but instead takes place in the nebulous world of "cyberspace." Persons carrying business in digital domain could be located anywhere in the world. Entrepreneurs across the world have been quick to evolve their business to take advantage of these changes. It has also made it possible for the businesses to conduct themselves in ways that did not exist earlier, and given rise to new business models that rely more on digital and telecommunication network, do not require physical presence, and derives substantial value from data collected and transmitted from such networks.

These new business models have created new tax challenges. The typical direct tax issues relating to e-commerce are the difficulties of characterizing the nature of payment and establishing a nexus or link between a taxable transaction, activity and a taxing jurisdiction, the difficulty of locating the transaction, activity and identifying the taxpayer for income tax purposes. The digital business fundamentally challenges physical presence-based p e r m a n e n t e s t a b l i s h m e n t r u l e s . I f p e r m a n e n t establishment (PE) principles are to remain effective in the new economy, the fundamental PE components developed for the old economy i.e. place of business, location, and permanency must be reconciled with the new digital reality.

The Organization for Economic Cooperation and Development (OECD) has recommended, in Base Erosion and Profit Shifting (BEPS) project under Action Plan 1, several options to tackle the direct tax challenges which include modifying the existing Permanent Establishment (PE) rule to include that where an enterprise engaged in fully de-materialized digital activities would constitute a PE if it maintained a significant digital presence in another country's economy. It further recommended a virtual fixed place of business PE in the concept of PE i,e creation of a PE when the enterprise maintains a website on a server of another enterprise located in a jurisdiction and carries on

business through that website. It also recommended to impose of a final withholding tax on certain payments for digital goods or services provided by a foreign e-commerce provider or imposition of a equalisation levy on consideration for certain digital transactions received by a non-resident from a resident or from a non-resident having permanent establishment in other contracting state.

Considering the potential of new digital economy and the rapidly evolving nature of business operations it is found essential to address the challenges in terms of taxation of such digital transactions as mentioned above. In order to address these challenges, Chapter VIII of the Finance Act, 2016, titled "Equalisation Levy", provides for an equalisation levy of 6 % of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment ('PE') in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India. Different provisions thereof are discussed below:

Chargeability [Sec. 165]

Equalisation levy shall be payable @ 6% of the consideration for any specified service received or receivable by a person, being a non-resident from:

i. a person resident in India and carrying on business or profession; or

ii. a non-resident having a permanent establishment in India.

Specified service means

a) online advertisement,

b) any provision for digital advertising space or any other facility or service for the purpose of online advertisement and

c) any other notified service – Sec. 164(i)

Online means a facility or service or right or benefit or access that is obtained through the internet or any other form of digital or telecommunication network – Sec. 164(f)

Taxpoint

These provisions extend to the whole of India except the State of Jammu and Kashmir.

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Exception

The equalisation levy shall not be charged, where:

a) The non-resident providing the specified service has a permanent establishment in India and the specified service is effectively connected with such permanent establishment;

b) The aggregate amount of consideration for specified service received or receivable in a previous year from resident in India or from a non-resident having a permanent establishment in India, does not exceed � 1,00,000; or

c) The payment for the specified service by the person resident in India, or the permanent establishment in India is not for the purposes of carrying out business or profession.

Collection and recovery of equalisation levy [Sec. 166]

Who is liable to deduct equalisation levy

Every person, being a resident and carrying on business or profession or a non-resident having a permanent establishment in India (hereafter in this Chapter referred to as assessee) shall deduct the equalisation levy from the amount paid or payable to a non-resident in respect of the specified service

Rate of levy: 6%

Threshold limit

Such deduction shall be made if the aggregate amount of consideration for specified service in a previous year exceeds � 1,00,000.

Time limit for depositing the levy to the credit of the Central Government

The equalisation levy so deducted during any calendar month shall be paid by every assessee to the credit of the

t hCentral Government by the 7 day of the month immediately following the said calendar month.

Consequences of failure to deduct equalisation levy

Any assessee who fails to deduct the levy shall be (even though not deducted) liable to pay the levy to the credit of the Central Government in accordance with the aforesaid provisions

Furnishing of Statement [Sec. 167]

th within 30 June immediately Every assessee shall,following the financial year, prepare and deliver to the Assessing Officer (or to any other authority or agency authorised by the Board), a statement in Form 1, verified in such manner and setting forth such particulars as may be prescribed, in respect of all specified services during such financial year.

An assessee who has not Revised Statement:

furnished the statement within aforesaid time or having furnished such statement, notices any omission or wrong particular therein, may furnish a statement or a revised statement, as the case may be, at any time before the expiry of 2 years from the end of the financial year in which the specified service was provided.

Where any Notice by the Assessing Officer:thassessee fails to furnish the statement within 30 June

immediately following the financial year, the Assessing Officer may serve a notice upon such assessee requiring him to furnish the statement in the prescribed form, verified in the prescribed manner and setting forth such particulars, within 30 days from the date of service of the notice.

Processing of Statement [Sec. 168]

Statement furnished u/s 167 shall be processed in the following manner:

a. The equalisation levy shall be computed after making the adjustment for any arithmetical error in the statement;

b. The interest, if any, shall be computed on the basis of sum deductible as computed in the statement;

c. The sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the interest against any amount paid u/s 166 or 170 and any amount paid otherwise by way of tax or interest;

d. An intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, him; and

e. The amount of refund due to the assessee shall be granted to him.

Time limit

No intimation shall be sent after the expiry of 1 year from the end of the financial year in which the statement is furnished.

Taxpoint

For the purposes of processing of statements, the Board may make a scheme for centralised processing of such statements to expeditiously determine the tax payable by, or the refund due to, the assessee.

Rectification of mistake [Sec. 169]

With a view to rectifying any mistake apparent from the record, the Assessing Officer may amend any intimation issued u/s 168, within 1 year from the end of the financial year in which the intimation sought to be amended was issued.

The Assessing Officer may make an amendment to any intimation either suo motu or on any mistake brought to his notice by the assessee.

An amendment to any intimation, which has the effect of increasing the liability of the assessee or reducing a

13



refund, shall not be made unless the Assessing Officer has given notice to the assessee of his intention so to do and has given the assessee a reasonable opportunity of being heard.

Where any such amendment to any intimation has the effect of enhancing the sum payable or reducing the refund already made, the Assessing Officer shall make an order specifying the sum payable by the assessee and the provisions of this Chapter shall apply accordingly.

I n t e r e s t o n D e l a y e d p a y m e n t o f equalisation levy [Sec. 170]

Every assessee, who fails to credit adequate equalisation levy to the account of the Central Government within specified period, shall pay simple interest @ 1% of such levy for every month or part of a month by which such crediting of the tax is delayed.

Penalty

Penalties provisions are as under:

No penalty shall be imposable:

1. If the assessee proves to the satisfaction of the Assessing Officer that there was reasonable cause for the said failure.

2. Without giving reasonable opportunity of being heard to the assessee [Sec. 173].

An assessee aggrieved by an order imposing penalty may appeal to the Commissioner of Income-tax (Appeals) within 30 days from the date of receipt of the order in Form 3. It shall be accompanied with fees of � 1,000/-. The provisions relating to appeals are in line with that of the Income-tax Act, 1961. [Sec. 174]

Similarly, appeals can be filed before the ITAT against the order of the Commissioner (Appeals) in Form 4 within 60 days from the date on which the order sought to be appealed against is received by the assessee or by the Commissioner. In case appeal before the ITAT is filed by the assessee, it should be accompanied with fees of � 1,000/- [Sec. 175]

Punishment for false statement [Sec. 176]

If a person makes a false statement in any verification or delivers an account or statement, which is false, and which he either knows or believes to be false, or does not believe to be true, he shall be punishable with imprisonment for a term which may extend to 3 years and with fine.

Taxpoint:

An offence punishable above shall be deemed to be non-cognizable.

No prosecution shall be instituted against any person for any offence except with the previous sanction of the Chief Commissioner of Income-tax [Sec. 177].

Sec. Nature of default Amount of Penalty

171(a) Fails to deduct the equalisation levy

Equal to the amount of equalisation levy

171(b) Fails to pay levy, after deduction, to the credit of the Central Government

100 for every day during which the failure continues subject to maximum of amount failed to pay

172 Failure to furnish statement as required u/s 172

100 for every day during which the failure continues

14


GROUP: 4, PAPER: 17

CORPORATEFINANCIAL REPORTING FINANCIAL REPORTING (CFR)(CFR)FINANCIAL REPORTING (CFR)



A 30%E 15%

D 15%

C 20% B 20%

A GAAP and Accounting Standards 30%B Accounting if Business Comminations & Restructuring 20%C Consolidated Financial Statements 20%D Developments in Financial Reporting 15%E Government Accounting in India 15%

Shri Sumit Kumar MajiAssistant Professor,Department of Commerce,The University of Burdwan, He can be reached at:[email protected]

15




After studying the present section of Corporate Financial Reporting you will be able to: Understand the concept of impairment loss.

Learn the recognition principle for impairment loss.

Corporate Financial Reporting

AS 28: Impairment Loss

AS 28 deals with the issue of impairment of assets. For representing the true and fair view of the state of affairs of the business, it is required that the value of the assets should be reliably measured. An asset should be valued based on its potential future earning capability i.e. the value of the asset should reflect the future value of the net expected

earnings to be derived from the productive use of the asset over its estimated useful life. Now if the asset is shown at any value over and above its potential earning capability, then its value must be reduced or impaired to bring down to its real worth and this reduction is known as impairment loss.

Impairment Loss (IL) = Carrying amount of the Asset (CA) - Recoverable Amount (RA)Where, CA is the amount at which the asset is shown in the books of account.RA is the highest of,Net Selling Price (NSP) ORValue-in-Use (VIU)[NSP is the maximum amount that can be received if the asset is hypothetically put to sale excluding any cost to sales such as commission, brokerage etc. and VIU is the present value of the expected net cash inflow that is expected to be received by the entity from the productive use of the asset during its life span.Once the amount of impairment loss in respect of any particular asset has been identified the next task will be to recognise such loss in the books of account.

Recognition of Impairment Loss:

Let us consider the following illustration for better understanding:Amy Ltd. purchased a plant on 01/01/2011 for Rs. 1000000 having estimated useful life of 10 years with Rs.5000 as the residual value. The company uses straight line method of depreciation. On 31/12/2015 the company identified some external causes of impairment loss. Thus the company decided to put the asset to test for impairment as on the same date. Calculate impairment loss under the following two situations:

Situation I: The asset is shown at historical cost.Situation II: The asset is revalued as on 01/01/2013 at Rs. 850000.Estimated net future cash inflows from the use of the asset are as follows:

If the asset is recorded at historical cost If the asset is recorded at revalued amount

and there was Revaluation Surplus arises

Charge the entire loss to the Profit and Loss

Account

First charge the loss to the extent of revaluation

reserve to the Revaluation Surplus Account.

Then balance if any to be charged to the Profit

and Loss Account.

Year ended Estimated cash inflow (in Rs.)

31/12/2016 80000

31/12/2017 75000

31/12/2018 60000

31/12/2019 55000

31/12/2020 45000

16



The weighted average cost of capital of the company is determined at 10%. The Net Selling Price is estimated at Rs. 312500 as on the date of impairment test. The commission for disposing off the plant is Rs. 2500.

Solution: Calculation of Value in Use:

Net Selling Price = (312500-2500) = 310000.

Thus Recoverable Amount is the Net Selling Price (being highest) = Rs. 310000.

Situation I:

Calculation of impairment loss:

Impairment loss Account..............................................................Dr. Rs.192500� � To Plant Account� � � � � � � Rs.192500(Being impairment loss raised)Profit & Loss Account .................................................................Dr. Rs.192500 � � To Impairment loss Account� � � � � � Rs.192500(Being impairment loss charged)

Situation II:

Calculation of impairment loss:

Year ended Estimated cash inflow

(in Rs.)

Present Value (PV) of Re.1 @

10% cost of capital

PV of Estimated cash

inflow(in Rs.)

31/12/2016 80000 0.909 72720

31/12/2017 75000 0.826 61950

31/12/2018 60000 0.751 45060

31/12/2019 55000 0.683 37565

31/12/2020 (45000+5000 i.e. scrap

value)

0.621 31050

Total Present Value of Estimated cash inflow i.e. Value in Use 248345

Particulars Amount in Rs.

Purchase price of the plant as on 01/01/2011 1000000

Less: Depreciation up to 31/12/2015

Rs.[(1000000-5000)/10]*5

497500

W.D.V. as on 31/12/2015 i.e. Carrying Amount 502500

Recoverable Amount 310000

Impairment Loss Rs.(502500-310000) 192500

Particulars Amount in Rs.

Purchase price of the plant as on 01/01/2011 1000000

Less: Depreciation up to 31/12/2012

[(1000000-5000)/10]*2

199000

WDV as on 31/12/2012 801000

Revalued amount of the plant as on 01/01/2013 850000

Transfer to Revaluation Reserve Account Rs.(850000-801000) 49000

Carrying Amount on 01/01/2013 850000

17



Impairment loss Account..............................................................Dr. Rs.223125

� � To Plant Account� � � � � � � Rs.223125

(Being impairment loss raised)

Revaluation Reserve Account .....................................................Dr. Rs.30625

Profit & Loss Account .................................................................Dr. Rs.192500

� � To Impairment loss Account� � � � � � Rs.223125

(Being impairment loss charged)

Less: : Depreciation up to 31/12/2015

Rs. [(850000-5000)/8]*3

316875

W.D.V. as on 31/12/2015 i.e. Carrying Amount 533125

Recoverable Amount 310000

Impairment Loss Rs. (533125-310000) 223125

Balance of Revaluation Reserve Account 49000

Less: : Excess depreciation due to revaluation for 3 years

Rs. [{(850000-5000)/8} – {(801000-5000/8}]*3

18375

Remaining Balance available in Revaluation Reserve Account Rs.(49000-18375) 30625

18


GROUP: 4, PAPER: 18

INDIRECT TAXLAWS & PRACTICE LAWS & PRACTICE (ITP)(ITP)LAWS & PRACTICE (ITP)



A Advanced Indirect Tax - Laws & Practice 80%B Tax Practice and Procedures 20%

B 20%

A 80%

Shri Abhik Kr. MukherjeeAssistant Professor,Dep. of Business AdmisitrationThe University of Burdwan He can be reached at:[email protected]

19



Learning objectives:

After studying this section, you will having an understanding of:

Concept of Registration under GST and benefits arising therefrom;

Nature of registration under GST law;

Persons liable to get registration under GST;

Types of registration under GST;

Time, place and effective date of getting registration.

REGISTRATION UNDER THE GOODS

AND SERVICES TAX: AN OVERVIEW

Introduction

Goods and Services Tax (GST) is a value-added tax levied on most goods and services sold for domestic consumption in India. Like in case of any other levy,

registration happens to be a very important area under the GST laws.

Registration under Goods & Services Tax

In any tax system, registration happens to be the most fundamental requirement for identification of tax payers ensuring tax compliance in the economy. Registration of the dealers happens to be a fundamental provision under the GST law. It is a mandatory step for any assessee under the GST. Registration under this statute confers the following benefits to the assessees:

A dealer would get legal recognition Legal recognition:

as supplier of goods and services on getting registered.

On getting registered, a Authorization to collect tax:

dealer becomes authorized to collect taxes from the

customers.

On obtaining Authorization to pass on credit:

registration, a dealer can pass on the credit of the taxes

paid on goods/ services supplied to its purchases/

recipients.

A registered dealer can Claiming input tax credit:

claim input tax credit of taxes paid and can utilise the

same for payment of output taxes due on supply of goods/

services.

Thus, it can be stated that registration binds the tax system,

and allows seamless flow of input tax credit from supplier to

recipient.

Nature of Registration under GST Law

Supplier of goods/ services needs to get

registered: GST being a tax on the event of “supply”, it

is the supplier of the goods or service or both that has to

get itself registered as and when required.

A given PAN Registration in GST is PAN based:

based legal entity would have one GSTIN per State, that

means a business entity having its branches in multiple

States will have to take separate State-wise registration

for the branches in different States. But within a State, an

entity with different branches would have single

registration wherein it can declare one place as principal

place of business and other branches as additional place

of business. However, a business entity having separate

business verticals (as defined in section 2 (18) of the

CGST Act, 2017) in a state may obtain separate

registration for each of its business verticals.

Supplier Registration under GST is State specific:

has to register in each of such State or Union territory

from where it affects supply of goods/ services.

Issuance of GSTIN & Certificate of Registration:

In GST registration, the supplier is allotted Goods and

Service Tax Identification Number called “GSTIN”, and a

Certificate of Registration incorporating therein the

GSTIN is made available to the applicant on the GSTN

common portal. The GSTIN is a 15-digit alpha-numeric

code wherein the first 2 digits of the GSTIN is the State

code, next 10 digits are the PAN of the legal entity, the

next two digits are for entity code, and the last digit is

check sum number.

It Registration under GST is not 'tax specific':

implies that there would be a single registration for all

the taxes under GST law viz. CGST, SGST/UTGST, IGST

and cesses.

Persons liable to Registration under GST Law

A person is registered or is liable to be registered under the

GST law is taxable person in GST. Two categories of persons

are liable to be registered under GST law:

Person liable to be registered mandatorily; and

Person liable to be registered provided aggregate

turnover of supply of goods or services or both exceeds

threshold limit.

It is mandatorily required to be registered under GST

(Discussed below); or

20



It is making taxable supply of goods or services or both

and its aggregate turnover in a financial year exceeds Rs.

20 lakhs (Rs 10 lakhs for North Eastern and hill states).

NB: If the turnover is supply of only exempted goods/

services which are exempt under GST, this clause does not

apply.

Types of Registration under GST Laws

Under the GST provisions, a person would be liable to pay

taxes if it is mandatorily required to be registered under GST,

or it is liable to be registered under GST. Thus, if the above

mentioned conditions are satisfied, a supply of goods/

services will have to get itself registered. However, any

supplier who does not fulfill the above conditions may on its

own get the registration done. Accordingly, the registration

under the Goods and Services statute in India can be

classified into two types – Mandatory/ Compulsory

Registration Voluntary Registration. and

Mandatory/ Compulsory Registration under GST

Law

Generally, the liability to register under GST arises when

aggregate turnover of a supplier exceeds the exemption

threshold. However, the GST law enlists certain categories of

suppliers who are required to get compulsory registration

irrespective of their turnover. In other words, the threshold

exemption of Rs. 20 lakhs (or Rs. 10 lakhs, as the case may

be) is not available to these specified suppliers. The suppliers

who need to register mandatorily under the GST statute

irrespective of the threshold limit are:

Person making inter-state taxable supply;

Casual taxable person making taxable supply;

A person receiving supplies on which tax is payable by

recipient on reverse charge basis;

Persons required to deduct tax under GST;

Non-resident taxable persons making taxable supply;

A person who supplies on behalf of some other taxable

person (viz. agent, broker, dealer etc. of some

principal);

Input service distributor;

E-commerce operators, who provide platform to the

suppliers to supply through it;

Suppliers who supply through an e-commerce operator;

Person supplying online information and data base

access or retrieval services from outside India to a non-

registered person in India;

Such other person or class of persons as may be notified

by the Government on the basis of recommendations of

the Council.

Voluntary Registration under GST Law

A person might get itself registered under the GST law inspite

of the fact that it is not mandatorily required to get

registration done under this statute. This brings the concept

of Voluntary Registration under GST. Once a person gets

itself voluntarily registered, all provisions of the relevant

Acts would apply upon him as they apply to a registered

person.

Persons not liable to Registration under GST Law

The following persons are not required to get themselves

registered under the GST law:

Any person engaged exclusively in the business of supplying goods or services or both that are not liable to tax or wholly exempt from tax;

An agriculturist, to the extent of supply of produce out of cultivation of land.

Persons who are only engaged in making supplies of taxable goods or services or both, the total tax on which is liable to be paid on reverse charge basis by the recipient of such goods or services or both.

The Government may, on the recommendations of the Council, by notification, specify the category of persons who may be exempted from obtaining registration under this Act.

Time Limit for Registration under GST Law

The time limit for registration depends on the fact whether a person is required to take mandatory registration or is opting for voluntary registration.

A person who is For mandatory registration:

required to get mandatorily registered, would have to

register itself within 30 days from the day when it

becomes liable to be registered.

A person who wants to For voluntary registration:

opts for registration voluntarily can take the

registration anytime as per its wish.

Place of Seeking Registration under GST Law

A person who is required to get itself registered would be

liable to be registered in the State or Union Territory from

where it makes taxable supply of goods or services or both.

Effective Date of Registration under GST Law

The effective date of registration in case of a person applying

for new registration depends on the fact whether the

application for registration has been submitted within the

due date (i.e. thirty days from the date on which the person

becomes liable for registration). Accordingly, the effective

date of registration will be as under:

When application for registration has been

submitted within the due date: The registration

21



will be effective from the date on which the person

becomes liable for registration; and

When application for registration has been

submitted after thirty days from the date on

w h i c h t h e p e r s o n b e c o m e s l i a b l e f o r

registration: The registration will be effective from

the date of grant of registration.

Deemed Registration under CGST Law

The concept of deemed registration arises under the CGST

Act. It is discussed hereunder:

The grant of Deemed grant of registration:

registration or the Unique Identity Number (UIN) under

the SGST Act or the UTGST Act shall be deemed to be a

grant of registration or the UIN under the CGST Act

subject to the condition that the application for

registration or the UIN has not been rejected under the

CGST Act.

On similar lines, Deemed rejection of registration:

any rejection of application for registration or the UIN

under the SGST Act or the UTGST Act shall be deemed to

be a rejection of application for registration under this

Act.

22


GROUP: 4, PAPER: 19

COST & MANAGEMENT AUDIT & MANAGEMENT AUDIT (CMAD)(CMAD)& MANAGEMENT AUDIT (CMAD)



A Cost Audit 35%B Management Audit 15%C Internal Audit, Operational Audit and other related issues 25%D Case Study on Performance Analysis 25%

A 35%D 25%

B 15%C 25%

CMA S S SonthaliaPracticing Cost Accountant,BhubaneswarHe can be reached at:[email protected]

23




To verify the correctness of the cost accounting records.

To find out whether the principles of cost accountancy have been fully and

correctly applied in maintaining cost records.

To search for the deficiencies in the cost record system of the company.

To attain efficiency in cost accounting systems and procedures

Topic: Cost Audit – Understanding Risk and Responsibility with reference to Cost Audi�ng Standards.

Cost Audit is an independent examination of cost statements, cost records and other related information of an entity, with a view to express an

opinion thereon. They are applicable to the companies as per the Companies (Cost Records and Audit) Rules, 2014 as amended.

One of the responsibility of the Cost Auditor is reporting of Fraud. Upon detection of fraud, the Companies Act 2013 has prescribed the procedures to be followed by the Auditor as per Section 143(12).

The Companies Act, 2013 has prescribed penalties for the auditor as per section 143 (13) for an amount of Rupees 1 lakh to Rupees 25 Lakhs for failure to meet the requirement. Furthermore, as per section 245 (2) - Where the members or depositors seek any damages or compensation or demand any other suitable action, from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.

In the Rule 13 of the Companies (Audit and Auditors) Rules, 2014 - Reporting of frauds by auditor and other matters:

1) If an auditor of a company, in the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of rupees one Crore or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government.

2) The auditor shall report the matter to the Central Government as under:-

a. The auditor shall report the matter to the Board or the Audit Committee not later than two days of his knowledge of the fraud, seeking their reply or observations within forty-five days;

b. On receipt of such reply or observations, the auditor shall forward his report and the reply of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within fifteen days from the date of receipt of such reply or observations.

c. In case the auditor fails to get any reply or

observations from the Board or the Audit Committee within the stipulated period of forty-five days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations;

d. The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same;

3) In case of a fraud involving lesser than the amount specified in sub-rule (1), the auditor shall report the matter to Audit Committee or to the Board not later than two days of his knowledge of the fraud and he shall report the matter specifying the following:-

a. Nature of Fraud with description;

b. Approximate amount involved; and

c. Parties involved

The above mentioned provisions requires the Cost Auditor to comply with the Standards of Cost Auditing as notified by the Cost Auditing and Assurance Standards Board (CAASB).

As per the present economic scenario, the Auditors are exposed to questioning and clarification in an event of financial mismanagement. To safeguard from future prosecutions, the Cost Auditors should follow the prescribed auditing standards to minimise the risk of occurrence of financial fraud and the detection of the same.In this article the emphasis is given on the specific steps to be followed for audit of Cost Records including any other certification work as discussed below.

Procedures for Audit of Cost Statements.There are 3 stages for audit of cost statements.

1. Planning,

2. Performing and

3. Reporting. The planning stage involves gaining an understanding of the client, identifying and listing the factors that may impact the risk of a material misstatement in the cost statements, performing a risk and materiality assessment, and developing an audit strategy. The risks associated to the business and the internal controls adopted by the entity is to be considered for the execution of audit assignment. The auditor has to formulate risk assessment strategies. The

24



procedures selected require the use of professional judgment based on the particular circumstances of the entity and the assessed risks of material misstatement.

The execution stage (or performing stage) of the audit involves the performance of detailed testing of internal controls and substantive testing of cost accounting policies & procedures. The auditor has to implement resources for assessment of the Risk of Material Misstatement. The findings of the auditor during the evaluation of the internal controls adopted by the organisation shapes the execution of the audit assignment.A robust internal control system reduces the audit risk whereas a liberal control system increases the audit risk and call for much more detailed examination. (Audit risk is the risk that the cost auditor expresses an opinion on the cost statements / records that are materially misstated.)

The reporting stage involves evaluating the results of detailed testing in light of the Cost Auditor's understanding of the entity and forming an opinion on the fair presentation of the entity's cost statements as a whole. At this stage, a cost auditor will draw conclusions based on understanding of the clients process and risks associated and testing the entity's controls, transactions, cost heads, item of cost and related disclosures. The auditor has to evaluate the evidence acquired during the execution of the audit to report on the factors that impact the risk of material misstatement. The auditor requires tocertify about the internal control systems adopted by the organisation in commensurate to the nature and size of business. The auditor thus has to obtain the evidence during the execution of audit to give such certification.

Risk and its applicability to Cost Auditing StandardsAll mandatory Standards on Cost Auditing (SCA)are applicable to the Cost Auditor as per provisions of Companies Act, 2013 and the Cost Audit perform his duties and reporting by adhering to these Standards. Presently there are 4 SCA which are mandatory and ------nos recommendatory in nature. Details about the mandatory SCA discussed below.

SCA 101 –Planning an Audit of Cost Statements (Applicable after September 11, 2015) –

a) As per para 5.5 ; The Cost Auditor shall develop an

audit plan. The audit plan will include the nature,

extent and timing of risk assessment, audit

procedures and other activities.

b) As per para 6.7 - The nature, extent and timing of

the direction and supervision of audit team

members and review of their work will vary

depending on, among others, the size and

complexity of the entities activities and the

capabilities and competence of the individual team

members performing the audit work.

SCA 102 - Cost Audit Documentation (Applicable after September 11, 2015) – The following points shall be documented by the Cost Auditor:

a) As per para 6.3 - The assessed risks of material

misstatement of cost.

b) As per para 6.7 - Those that causes a revision of the

Cost Auditor's previous assessment of the risks of

material misstatement.

c) As per para 6.7 - Matters that cause the Cost Auditor

significant difficulty in applying necessary audit

procedures.

SCA 103 - Overall Objectives of the Independent Cost Auditor and the Conduct of an Audit in Accordance with Cost Auditing Standards (Applicable after September 11, 2015) –

a) As per para 6.3, in the Context of Professional

Scept ic ism- When making inquir ies and

performing other cost audit procedures, the cost

auditor should not be satisfied with just with

management statement / certificate. Rather to

obtain sufficientand appropriate audit evidence to

be able to draw reasonable conclusions on which to

base the Cost Auditor's opinion.

b) As per para 6.4 - The Cost Auditor reduces audit

risk by designing and performing audit procedures

to obtain sufficient and appropriate audit evidence

to be able to draw reasonable conclusions on which

to base an audit opinion. Reasonable assurance is

obtained only when the auditor has reduced audit

risk to an acceptably low level.The cost auditor

considers the risk of material misstatement at two

levels:

(1) The overall cost statement level and

(2) In relation to cost heads, items of cost and

disclosures and the related assertions.

SCA 104 - Knowledge of Business, its Processes and

the Business Environment (Applicable after

September 11, 2015) -

a) As per para 5.3 - The cost auditor shall obtain an

understanding of internal controls relevant to the

audit and the entity's risk assessment process. The

cost auditor shall obtain an understanding of

whether the entity has a process for:

(1) Identifying business risks relevant to cost

reporting objectives;

(2) Assessing the likelihood of their occurrence;

(3) Estimating the significance of the risks; and

(4) Deciding about actions to address those risks.

b) As per para 5.5 - the cost auditor shall:

(1) Identify risks including relevant controls that

relate to the risk of materialmisstatements or a

risk of fraud;

(2) Assess whether the risk is related to recent

25



significant economic, accounting or other

developments and, therefore, requires specific

attention;

(3) Assess whether the risk involves significant

transactions with related parties;

(4) Assess the degree of subjectivity in the

measurement of information related to the

risk.

(5) Assess whether there arises a need for revising

the assessment of risk based on additional audit

evidence obtained.

c) As per para 5.6 - The auditor shall document:

1) Key elements of the understanding

obtained regarding each of the aspects of the

entity and its environment and of each of the

internal control components, the sources of

information from which the understanding was

obtained and the risk assessment procedures

performed;

2) The identified and assessed risks of

material misstatement at the cost statement

level and at the assertion level including items

of cost, cost heads and disclosure thereof ; and

3) The risks identified, and related controls

about which the auditor has obtained an

understanding.ConclusionIn view of the all above the auditor should careful and diligent in performing his audit work, failing which he also carries risk of panel provisions.

26


GROUP: 4, PAPER: 20

STRATEGICPERFORMANCE MANAGEMENTPERFORMANCE MANAGEMENTAND BUSINESS VALUATION AND BUSINESS VALUATION (SPBV)(SPBV)PERFORMANCE MANAGEMENTAND BUSINESS VALUATION (SPBV)



A 50%

B 50%

Dr. Mohua Das MazumdarAssistant Professor and HOD,Department of Commerce,Rampurhat CollegeShe can be reached at:[email protected]

27




After studying this section on Strategic Performance Management and Business

Valuation, you will be able to:

understand and derive the two stage dividend growth model of equity share

solve the problem on two stage dividend growth model of equity share

Strategic Performance Management and Business Valuation

The two stage growth model assumes that the extraordinary growth rate, g , exists for an initial phase and thereafter the 1

normal stable growth rate, g , is assumed to begin and will continue indefinitely. Assuming that the dividends move in 2

line with the growth rate, the value of the equity shares (P ) will be:0

P = PV of dividends during extraordinary phase + PV of terminal phase0

2 nD (1+g )� D (1+g ) � � � D (1+g ) � P0 1 0 1 0 1 n

P = ------------ + --------------- + - - - -- - - - - -- + ------------------- + -------------- …….(1) 02 n n (1+k) � (1+k) � � � (1+k) � (1+k) � � �

Since the two-stage growth model assumes that the normal growth rate (g ) after n years remains constant, P will be equal 2 n

to:

n n 2 n D (1+g ) (1+g )� D (1+g ) (1+g ) �� D (1+g ) (1+g )∞0 1 2 0 1 2 0 1 2

P = -------------------------- + -------------------------- + - - - - - - - - - + ------------------------n

2 (1+k)� � � (1+k) � � (1+k)∞�

n t ∞� D (1+g ) (1+g )0 1 2

= ∑ -------------------------------t t=1 � � (1+k)

Putting the value of P in the equation (1), we get,n

2 n n t D (1+g )� D (1+g ) � D (1+g ) � 1 ∞ D (1+g ) (1+g ) �0 1 0 1 0 1 0 1 2

P = ------------ + ------------- + - - - -- - + ---------------- + ---------- [ ∑--------------------------]02 n n t (1+k) � (1+k) � � (1+k) � (1+k) t=1 (1+k)

Despite the limitations like defining the length of the extraordinary growth period, sudden transformations from high growth to low growth etc, this model is best suited for firms that are in high growth and expect to maintain that growth rate for a specific period; after that the sources of the high growth are expected to disappear and accordingly stable

t n tn D (1 + g ) D (1 + g ) (1 + g )10 1 0 1 2= + nt tt=1 t-1(1 + k)(1 + k) (1 + k)

nnD (1 + g ) 1 + g0 1 1 D (1 + g ) (1 + g )0 1 21 -

1 + K 1 + k 1 (1 + k)= + n(1 + g ) (1 + g )(1 + k)1 21 1

(1 + k) (1 + k)

nD (1 + g ) (1 + g )0 1 11 -

(1 + k) (1 + k)=

nD (1 + g ) (1 + g )0 1 2

1 (1 + k)+ n1 + k - 1 - g 1 + k - 1 - g(1 + k)1 2

(1 + k) (1 + k)

n nD (1 + g ) D (1 + g ) (1 + g )1 + g 10 1 0 1 21= 1 - + ......................... (2)n

k-g 1 + k (1 + k) k-g1 2

28

8

8

8



growth starts. Illustration 1The current dividend of an equity share of Z Ltd., is Rs 4. Z Ltd. is expected to enjoy an extraordinary growth rate of 22% for a period of 7 years. Thereafter the growth rate will fall and stabilize at 12%. What is the intrinsic value of the equity share of Z Ltd. if the required rate of return is 16%?

SolutionSince there are two growth rates and the extraordinary growth rate falls and stabilize at a normal growth rate, we have to apply two-stage growth model of equity valuation. According to the model, the intrinsic value of equity share will be:

Illustration 2X Co Ltd. reported that earnings per share was Rs. 3.82 and dividend per share was Rs. 1.92 in 2012. For estimating the cost of equity X Co. Ltd. used a risk-free rate of 3.50% and market equity risk premium of 5% and computed beta of 0.90 in 2012. To estimate the expected growth rate, the said company will start with the firm's current return on equity (20.09%) and payout ratio (49.74%) and assume numbers very close to these for the next five years:Expected ROE for next 5 years = 20%Expected retention ratio for next 5 years = 50%Expected growth rate for next 5 years = 20% x 50% = 10%.Applying the above mentioned growth rate to earnings and dividends for the next 5 years and discounting these dividends back at the cost of equity, X Co. Ltd wants to arrive at a value per share for the high growth period.

thIt is assumed that after 5 year X Co. Ltd. will be in stable growth, growing 3% a year and the return on equity for the firm will drop to a more sustainable rate of 12% in perpetuity and beta shall move up to 1 in stable growth.You are required to compute the value per share.

SolutionCost of equity = 3.50% + 0.90 (5%) = 8%Table showing the necessary calculations for finding out the value per share for the high growth period

n nD (1 + g ) D (1 + g ) (1 + g )1 + g 10 1 0 1 21P = 1- +0 n

k -g 1 + k (1 + k) k-g1 2

where,

D =Rs40

g =22%1

g =12%2

n=7

k=16%

7 74(1 + 0.22) 1 + 0.22 1 4(1 + 0.22) (1 + 0.12)

P = 1- + ×0 70.16-0.22 1 + 0.16 (1 + 0.16) 0.16 - 0.12

4.88= 1 -1

-0.06

1 16.09 × 1.12.42 + ×

2.83 0.04

4.88 × 0.42 1 18.02= + ×

0.06 2.83 0.04

2.0496= + 159.187

0.06

= 34.16 + 159.187 = Rs 193.347

Year Earnings per share Payout ratio Dividend per share Cost of equity Present value

1 Rs. 4.20 50% Rs. 2.10 8% Rs. 1.94

2 4.62 50% 2.31 8% 1.98

3 5.08 50% 2.54 8% 2.02

4 5.59 50% 2.80 8% 2.06

5 6.15 50% 3.08 8% 2.10

Rs.10.10

29



Expected growth = Retention ratio x Return on equity� � = (1 – Payout ratio) x Return on equityOr, Expected growth/ Return on equity = (1 – Payout ratio)Or, Payout ratio = 1- Expected growth/ Return on equity � � = 1- ( 3%/ 12% ) = 75%

Cost of equity in the stable growth period = 3.50% + 1 (5%) = 8.5%thValue per share at the end of 5 year =

[EPS (1 + Growth rate ) (Payout ratio )]/ (Cost of equity – Growth rate )5 stable stable stable stable

= Rs. 6.15 (1.03)(0.75) / (.085 - .03) = Rs. 86.38

Discounting this price at 8% (the cost of equity for the high growth period) and adding the present value of expected dividends during the high growth period yields the following value per share:Value per share = PV of dividends in high growth + PV of value at the end of high growth

5� � = Rs. 10.10 + (Rs 86.38/1.08 ) = Rs. 68.89

30

Leadership Matrix

Leadership is perceived as a practical skill encompassing the ability of an individual to “lead” others. The leadership

could be autocratic, participative or laissez-faire.The leadership could come as an instance of inheritance,

nomination or acquisition. Princely kings are the examples for inherited leadership; bureaucratic appointments are

the models for leadership by nomination; and democratically elected leaders fit into the nomenclature of

acquisition. However, it is the fruitful outcome that counts for the leader to be remembered as a leader.

The leader inspires the populace, motivates and guides them towards achieving focused goals. At the functional

level, the leader enables the team in implementing the planned targets.Studies of leadership have produced several

theories involving umpteen traits that are instrumental in carving a leader.We choose a dozen of the traits as being

more important than the others. Here follow the Chosen Dozen.

1. Vision

Great leaders have the ability to look ahead and anticipate the things-to-happen well in advance. They have the

acumen to see through the future. They have a clear idea of the direction in which they are moving and as to what

they intend to accomplish. Having a clear vision turns the individual into a special type of person and shores up the

individual over others. This quality of vision changes a 'transactional commoner' into a 'transformational leader'.

Leaders with foresight do always reap the gains of the “first mover advantage.” In the Indian context “Make in

India” is an example of transformational vision.

2. Values

Many a time, a leader is known by the values he stands for. Values refer to the lasting ideals shared by a community.

Values nurture and influence the human behaviour and serve as broad guidelines in all eventualities. A leader

advocates the values that he believes to be good for the community irrespective of the fact that the perceptions may

differ from country to country, region to region and religion to religion. For example, Indian values are founded on

joint family system whereas American values are structured on nucleus family system. Other things apart, human

values propound honesty, integrity and fair attitude across the universe. The deeds and acts of a leader tend to add

specific beneficial value to the community. Abraham Lincoln's anti slavery drive and Mahatma Gandhi's

nonviolence movement may be cited as value models of immense impact.

3. Inspiration

Leaders possess the ability to inspire the people to fall in line with their principles and goals. Inspiration kindles the

spirit of motivation and leads to massive multiplication. Recall the first meeting between the young Narandranath,

come to be known as Swami Vivekananda later, and the sage, Ramakrishna Paramahamsa. Naren was a very logical

and intellectual boy with full of fire. He confronted Ramkrishna too with the same customary question that he

normally put forward to the spiritual men he had met, “Have you seen God?". Ramakrishna answered, “Yes, I have

seen God. I see Him as I see you here, only more intensely!" Naren was inspired and Swami Vivekannada was born.

It is a historical fact, now, that Swami Vivekananda went on to inspire the whole world for generations.

4.� Charisma

Charisma is avirtue of attraction endowed on the select few. At times charisma is considered as a divine bestowal.

CMA (Dr.) Sreehari ChavaCost & Management Consultant,Nagpur, Maharastra,He can be reached at:[email protected]



31

Very few leaders are known to possess the charisma. A leader, with charisma, can mesmerize the target audience

with astounding magnetism. Charisma creates an invisible aura of influence thereby casting a spell bound impact

on the community. Eminent personalities like John Kennedy, Pandit Jawaharlal Nehru and Atal Bihari Vajpayee

are regarded for their charismatic leadership.

5. Creativity

Leaders are creative. Their thinking is incessantly 'outside the box'. Creativity is the foundation for inventions and

innovations. Situations are different from time to time and are quite difficult at times. It is up to the leader to think

outside the box and find a solution for a difficult situation with a quick decision which must also be a good. Henry

Ford faced a situation like this when demand for his vehicles was so high that he couldn't possibly cope with. Instead

of going in for the routine approach of hiring more people to produce more, he thought with creativity and

developed the concept of 'assembly line of production' for a galaxy of entrepreneurs to follow suit. It is no wonder

that the economic advancements achieved by USA and many of the European countries are mostly on account of the

creative innovations over the last few decades.

6. Competency

Competency is a specific attributeof successful leaders. Competency is the ability to make effective use of the

capabilities. Competency propels conversion of intangible capabilities into tangible end-results. Competency

facilitates synergic output. Competency leads to competitive advantage. Competency is the Key Success Factor that

an individual possesses in marshalling the resources on hand to achieve the ambitious goal. A competent leader can

prove to be the winning difference to an odd team. Think of Lord Rama who vanquished the mighty Lanka with the

help of nomadic monkey army. Rama's competency speaks of the towering elevation that a competent captain can

bring in to a team of any sorts.

7. Commitment

Great Leaders are committed to the core. Commitment is that characteristic of leadership that elevates a leader from

the general masses. Commitment is dedication for the cause. Commitment paves the way for the realizable effects. A

leader is the one who sets the tone of commitment for others to emulate. Commitment generates greater respect and

recognition fo ra leader. Mother Teresa's commitment to charitable works brought in her intercession by Pope

Francis in December 2015 leading the process for her to be recognised as a saint.

8. Courage

Among the leadership qualities, courage is the most identifiable outward trait. Courage makes a leader valiant.

Courage comes to play in risky situations. Courage implies willingness to take risks towards achieving goals with no

assurance of success. As human life is full of uncertainties, every action entails a risk of some kind. At times, it is the

courage alone that draws the line between the leaders and others. Lokmanya Tilak declared “Freedom is my Birth

Right” which eventually lead to Indian Independence. And it is that exemplary courage that sets the great leaders

aside.

9. Perseverance

Leaders are known to be firm and resolute in their principles and policies. It is the quality of perseverance that

enables a leader to be unwavering and determinate. Perseverance springs up firmed-up beliefs. The underlying

theme is 'Believe in what you Do & Do what you Believe'. It is a historical fact that Shivaji's perseverance in fighting

for Hindu Dharma had ultimately led to his incarnation as Chatrapati.

10. Focus

Focus on the target is what a leader preaches and practices with concentration. Leaders always focus on the results.

They focus on what must be achieved by themselves, by others, and by the team as a whole. The focus, always, is on



32

the collective strengths of the team. The leaders have the ability to call the shots and make sure that everyone is

focused and concentrated on the most valuable use of their time and efforts as are essential to achieve the targeted

end results. Focus provides unidirectional approach to the entire team as such. The focused aim is to win the war

and not the stray battles. On the individual front, it is well said that Arjuna turned out to be the best ever archer

because he had the focus in letter and spirit.

11. Humility

Humility is humbleness. The best leaders are known to be ever humble.Great leaders are those who are strong and

decisive but also humble. Humility portrays the self-confidence and self-awareness that extend to recognize the

value of others without having any feeling of being threatened. Humility does not mean that one is weak or unsure of

oneself. It means that one is willing to admit that one could be wrong at times. It also means that one is willing to give

the credit where and when it is due. Humility gets results. Humility allows one to acknowledge one's mistakes. The

leader with humility is one who passes on the credit for success to the team and takes the blame on self for the short

falls.The great guru Gautama Buddha is known for compassionate humility.

12. Bonding

A leader multiplies several-fold through the means of bonding. Bonding implies sticking together through thick and

thin. Bonding is that trait which enables a leader to align with masses. Bonding fosters loyalty, spreads team spirit

and facilitates delegation. Bonding leads to team building. Bonding creates collective strengths. Successful

corporate leaders acknowledge the trait of bonding as a significant reason for their growth. Leaders gain the

cooperation of others by making a commitment to get along well with each key person every single day. An

individual always has a choice when it comes to a task: He can do it himself, or he can get someone else to do it for

him. Which is it going to be? The answer is 'Bonded sticks are perpetually stronger!'

Quick Take

The dozen of the traits, discussed in the preceding paragraphs, are important elements that go to make a 'Leader'.

The beauty of it is that these traits can be cultivated through diligent learnings and practices. The leaders, referred to

in the narratives, possess all of these traits plus something more. The list is, thus, inclusive and not exclusive at all.

Insights into the life sketch of these role model leaders would add to the proficiency inculcations of any common

individual. And, there is no bar that prevents a commoner from becoming a leader. So, Start up, Gear up, Raise up

and Make in a Leader!



33

Examination Examination

TIME TABLETIME TABLE

Day & Date Final Course Examination Syllabus - 2016 Time 2.00 p.m. to 5.00 p.m

Monday,11th June, 2018

Corporate Laws & Compliance (CLC)

Tuesday,12th June, 2018

Strategic Financial Management (SFM)

Wednesday,13th June, 2018

Strategic Cost Management - Decision Making (SCMD)

Thursday,14th June, 2018

Direct Tax Laws and International Taxation (DTI)

Friday,15th June, 2018

Corporate Financial Reporting (CFR)

Saturday,16th June, 2018

Indirect Tax Laws & Practice (ITP)

Sunday,17th June, 2018

Cost & Management Audit (CMAD)

Monday,18th June, 2018

Strategic Performance Management and Business Valuation (SPBV)



34

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Message from

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Dear Students,

We have stepped into 2018 and with new enthusiasm for the future to come, it is also a time to reflect on the year gone by and

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Behind every successful business decision, there is always a CMA 37

Glimpses of Interactive E vent jointly organised by Governance Now and Sri Adhikari Brothers (SAB) group on " C o r p o r a t e G o v e r n a n c e f o r S ustainable E conomic Gr owth" on 28th February, 2018 at New Delhi.

National seminar on GST-Jointly Organized by the Inst i tute & Bhubaneswar Chapter, dated 27th & 28th January 2018 at Bhubaneswar, Odisha.

Glimpses of National Seminar on “CMAs Partner in Vision 2022- for Vibrant India” organized by the WIRC of the Institute during 10th & 11th February, 2018 at Mumbai

Glimpses of 39th Cost Conference on “Transforming India through Cost Governance” jointly organized by the EIRC and Howrah Chapter of the Institute during 9th & 10th February, 2018 at Kolkata

SNAPSHOTS



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