theme : cost auditwirc has commenced its online oral coaching classes for the new batch. i am...

WESTERN INDIA REGIONAL COUNCILTHE INSTITUTE OF COST ACCOUNTANTS OF INDIA

(Statutory Body under an Act of Parliament)Rohit Chambers, Janmabhoomi Marg, Fort, Mumbai 400 001.

Tel.: 2204 3406 / 2204 3416 / 2284 1138 • E-mail : [email protected] • Website : www.icmai-wirc.in

Vol. 48 No. 9 Sept. 2020 Pages 38 Price: Rs. 5/- RNI No. 22703/72

Inside Bulletin

EDITORIAL BOARDChief Editor:

CMA Ashishkumar BhavsarEditorial Team:

CMA Chaitanya MohrirCMA Arindam GoswamiCMA Sujata BudhkarCMA H. C. ShahCMA Rahul JainCMA Amit Shantaram ShahaneCMA Aparna Arvind Bhai BhondeCMA Dr. Niranjan ShastriISSN 2456-4982

Theme : COST AUDIT

Page

Cover Stories : • ImportanceofCostAudit CMA Santosh S. Korade 4

• CostAuditMechanisminIndiaVsOtherCountries CMA Virendra Chaturvedi 7

• CostAudit:BirdEyeView CMA Nikhil Pawar 10

CFO Speaks : CMA Bhadresh V. Mehta 12

Other Articles • AnAnalyticalstudyonfinancialimpactofmergerof.... CMA (Dr.) Gaurav Sharma 15

• PortfolioAnalysis&VisualizationwithExcel CMA Manohar V. Dansingani 19

• GlobalCorporateMisgovernanceLessons-TwoCaseStudies CMA (Dr.) Subir Kumar Banerjee 23

• CanHUFmakepayment(Gift)toMarriedDaughter? CMA Prutha Harshit Shah 26

• ANoteonNominal&RealCash-Flows Vishal Gupta 28

• ImportanceofProperAllocation,Apportionmentand.... CMA Rajesh Kapadia 29

Chapter News .... 31

WIRC BULLETIN – SEPTEMBER 2020

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DearCMAProfessionalColleagues,

It’sapleasuretocommunicatewithyouonemoretime.AtthetimeofmylastcommunicationIwashopefulaboutconductingtheelectionsfortheofficebearersofWIRCinthemonthofAugust.In-facttheelectionswereplannedon20thAugust2020.ButduetorequestfrommanyCouncilMemberstocanceltheelectioninthelightoftheCOVID19travelrestrictionstheelectionswerecancelled.Nowonceagaintheelectionsareplannedon12thSeptember2020.IamoneagainhopefulthatthistimewewillbeconducttheelectionandwewillsoonhaveteamofNewOfficeBearersforWIRC.

TheAGMofWIRCwasheldon19thAugust2020throughVideoConferencing.ForthefirsttimeinthehistoryofWIRCtheAGMofWIRCwasconductedusingVirtualMode.I thankall themembersofWIRCfortheirsupportandparticipationintheAGMofWIRC.TheAccountsofWIRCfortheyear2019-20alongwiththeAnnualReportfortheyearwereadoptedbytheAGM.AGMofferstheopportunityforthememberstomeeteachotherandsocialise.Duetotheon-goingpandemicsituation,thiscouldnotbeaccomplished.Iamlookingforwardtothetimewhenweallcanmeetphysicallyandhaveinteraction.

WIRChascommenceditsOnlineOralCoachingClassesforthenewbatch.IamthankfultoCMAChaitanyaMohrir,CMAVinayakKulkarni&CMAAshishBhavsarfortakinguptheresponsibilityofcoordinatingwithChapters.IampleasedtoinformyouthatmanyChaptersofWIRCareparticipatinginthisOnlineTraininginitiativeofWIRC.IamthankfultothestaffofWIRC&FacultyofWIRCfortheircontinuedwholeheartedsupport.

WIRCEditorialBoardundertheleadershipofCMAAshishBhavsarisdoingagreatjobofbringingoutqualityeditionsoftheWIRCBulletin.ThismonththefocusisonCostAudit.ConsideringtheCostAuditperiod,itisthemostappropriatetimeforsharingtheknowledgeonthisspecificsubject.

TheInstitutehasconductedOnlineExamfortheFoundationStudents.IonbehalfofWIRCcongratulateourPresidentCMABalwinderSinghjialongwithalltheCouncilMembersandtheentirestaffoftheInstituteinvolvedinthisexercise.ThisisthebeginningofaneweraintheInstitute’sexaminationsystem.IamconfidentthiswillopenalotofavenuesfortheInstituteandwillenablestudentsacrosstheglobetobepartofourCMAFamily.

OurHon.PrimeMinister,Shri.NarendraModijihasannouncedthevisionofMakeinIndiaandAtmanirbharBharat. It is surely has created a spirit of nationalism, but it has also paved way for some professionalopportunities.LocalContentisbecomingabuzzword.IhavemaderepresentationstotheGovt.OfficialstoincreasethespreadofthisconcepttopromotetheAtmanirbharBharatandMakeInIndiaconcepts.Butonamoreindividuallevel,IamoftheopinionthattheCMAsasprofessionalsarebestsuitedtohelptheorganisationsdeterminetheLocalContentandwehavetoexplorethisasaprofessionalopportunitythatwillalsohavesomesocialserviceangletoit.

TheunlockprocessinIndiaisinfullswing,butatthesametimethenumberofcasesofCOVID19acrossthecountryareonsteeprise.Iurgeallmyfellowprofessionalstofollowthenormsofsocialdistancingandtakeallthenecessaryprecautionstokeepyourselfandthesocietyhealthy.Ipraygodforyoursafetyandhealth.

“Tokeepthebodyingoodhealthisaduty,forotherwiseweshallnotbeabletotrimthelampofwisdom,andkeepourmindstrongandclear–Buddha”

StayHealthy&StaySafe!

SincerelyYours,

CMA Neeraj Dhananjay JoshiChairman, ICAI-WIRC

Please follow the Norms of Social Distancing. Be Safe.

From the Desk of Chairman . . . . . .-


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From Desk of Chief Editor . . . . . .-

DearCMAProfessionalColleagues,

Hopeyouallaresafeanddoingwell!!!

September is themonthofauditandweallarebusy inaudit relatedworkeitherasauditeeoras

auditor.DuetothepandemicofCOVIDitisverydifficulttime,bothforauditoraswellasauditeeto

completeaudittask.Lookingtothesituation,editorialboardhadChosen“CostAudit”asthemeforthe

monthofSeptemberbulletin.Wehavereceivedgoodresponsefrommembers.Articlesonthethemeare

publishedascoverstory.Wearealsopublishingarticlesonotherprofessionalmatters.Iamthankful

toallauthorsforprovidingarticlesandmakingWIRCbulletinaKnowledgePack.

WehavealsostartpublishinginterviewofCMAswhohadreachedarespectablepositionlikeCFO,VP,

Directoretc.ObjectiveofthesametosharetheirexperiencewithCMAfraternity.Itwillinspireyoung

CMAsformakingfuturebrighter.Inthisbulletin,wehavepublishedinterviewofCMABhadreshV.

MehtaGlobalCFOofSymphonyLimited.IamthankfultoCMAMalharDalwadiforconductingthe

interview.IrequestourproudCMAswhoreachthishighestpositionduringtheircareertosharetheir

experiencewithCMAfraternity.Placereachussothatwecanconductinterview.

IurgememberstoshareknowledgebywayofarticletomakeWIRCBulletinsKnowledgePack.

WewelcomesuggestionandfeedbackforbettermentofWIRCBulletin.

StaySafe

HappyReading!!!

WithWardRegards

CMA Ashish BhavsarChairman, Editorial Board


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Importance of Cost AuditCMA Santosh S. Korade

Mob.:9730577016•E-mail:[email protected]

AbstractAsperCompanyAct2013,CostRecordsaretobemaintainedbysuchclassofcompaniesasprescribed,accordinglyCompanies(Cost Records andAudit) Rules, 2014 has issued andmadeapplicabletosuchcompanies,AlsocostauditisapplicabletosectorsmentionedinTable“A”forregulatorysectorsandTable“B”fornon-regulatorysectorsonbasisofturnovercriteria.CostAuditisoneofthestatutoryauditmandatoryasperSection148(2)ofCompanyact2013.Thisstudyisgoingtoanalysetheimportanceofcostauditinrespectofnumbersofstakeholderslikeasmanagement,consumers,owners,government,generalpublicetc.

Cost Audit - MeaningCost Audit is a critical review undertaken to verify thecorrectnessofCostAccountsandtocheckthatcostaccountingprinciples and planning have been efficiently followed. It isnoteworthythatIndiaistheonlycountrywhichhasintroducedstatutory cost audit to regulate about 39 vital industries ofthecountry.CharteredInstituteofManagementAccountants(CIMA)ofLandondefinedCostAuditas“theverificationofcostaccountsandacheckontheadherencetothecostaccountingplan.”

The ICAI (The Institute of Cost Accountant of India)defines Cost Audit as a “Statutory Cost Audit system ofaudit introducedby thegovernmentof India for the review,examination,andappraisalofthecostaccountingrecordsandattendantinformationrequiredtobemaintainedbyspecifiedindustries.”

This is involves not only the examination of cost accountsbut also the fact that the plan prepared in this connectionhasbeendulyexecuted.Thefirstfunctionofcostauditistheverification of cost accounting records according to the costaccountingsystem,andthesecondfunctionisthecheckingontheadherencetothecostaccountingplan.

TheconceptofcostaudithasbeenelaboratedbyICAIas‘anaudit of efficiency of minute details of expenditure, whiletheworkis inprogressandnotapostmortemexamination.Financial audit is a ‘fait accompli’, cost audit is mainly apreventive measure, a guide for management policy anddecision in addition, to being a barometer of performance’.CostAuditcanbecalledefficiencyaudit.

Types of Cost Audit• CostAudittoAssistManagement• CostAuditonbehalfoftheGovernment

• CostAuditonbehalfofaCustomer

• CostAuditonbehalfofTradeAssociation

• CostAuditonbehalfofTribunals

• CostAuditunderStatute

Statutory provision of Cost Audit in IndiaCentral Government to Specify Audit of Items of Cost in Respect of Certain Companies (Section 148 of Company Act 2013)

148. (1) Notwithstanding anything contained in thisChapter,theCentralGovernmentmay,byorder,inrespectof such class of companies engaged in the production ofsuchgoodsorprovidingsuchservicesasmaybeprescribed,directthatparticularsrelatingtotheutilisationofmaterialorlabourortootheritemsofcostasmaybeprescribedshallalsobeincludedinthebooksofaccountkeptbythatclassofcompanies:

Provided that theCentralGovernment shall, before issuingsuch order in respect of any class of companies regulatedunderaspecialAct,consulttheregulatorybodyconstitutedorestablishedundersuchspecialAct.(2) If the Central Government is of the opinion, that it isnecessarytodoso, itmay,byorder,direct that theauditofcost records of class of companies,which are covered undersub-section(1)andwhichhaveanetworthofsuchamountasmay be prescribed or a turnover of such amount asmay beprescribed,shallbeconductedinthemannerspecifiedintheorder.Section148(1)readwithRule3ofCompanies(CostRecordsandAudit)Rules,2014hasspecifyclassofcompanies(Turnover>=35Crs)requiredtomaintaincostrecords.AuditofrecordsmaintainedasperSec.148(1)ismandatorytosuchclassofcompaniesasperSection148(2)readwithRule4ofCompanies(CostRecordsandAudit)Rules,2014.SoCostAuditisoneofstatutoryauditinIndiaaslikeasFinancialAudit.Table“A”ofrule3coveredregulatorysectorslikeasTelecommunications,Electricity,PetroleumProducts,Pharmaceutical,Fertilizers,Sugar etc. Table “B” of rule 3covered other important non-regulatorysectors.

Application of Cost Audit (Rule 4)Every company will have to get its cost records audited inaccordancewiththeserules,if:

Particulars TableA (Regulatory)

TableB(NonRegulatory)

Overallannualturnoverfromallitsproductsandservicesduringtheimmediatelyprecedingfinancialyear[and]

Rs.50.00Crsormore

Rs. 100.00 Crsormore

Aggregateturnoveroftheindividualproductorproductsorservicesorservicesforwhichcostrecordsarerequiredtobemaintained

Rs.25.00Crsormore

Rs.35.00Crsormore

Non applicability of Cost audit: Requirement of cost auditisnotapplicabletoacompanywhichiscoveredinRule3of


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AmendmentRulesand• Whoserevenuefromexportsinforeignexchangeexceeds

75%ofitstotalRevenue.• WhichisoperatingfromSpecialEconomicZone(SEZ).

Importance of Cost audit to ManagementOneofimportanceofacostauditwillbethatmanagementwillbesuretogetreliabledataforitsobjectiveslikeaspricefixing,decision-making, control, etc. Existence of such a system ofauditwillalsobeofgreatuseformaintaininginternalcheckandcontrolandwillbeofgreathelptoevenfinancialaudit.Butitmustbeunderstoodthattheaimsoffinancialandcostaudit are different. Cost Audit will establish the accuracyof cost of each product, job, activity, etc., and is concernedwith proper analysis of information and its estimation sothatmanagement gets the necessary information promptly.Apartfromreliabilityofdata,costauditshouldaffordcertainincidentaladvantages.Rather,itshouldbesaidthatcostauditwillhelpconsolidateandrealizeadvantagesexpectedfromasystemofcosting.Theauditingofcostaccountsactslikeausefultoolinthehandsof management for the detection of frauds, inconsistenciesandirregularities.Thefunctionofthecostauditorissuchaslubricating themachines that is why effective, reliable andsmoothfunctioningofthecostingsystemissustained.Oncostreportsaftercostauditgreaterreliabilitycanbeputand,Sodecisionmakingcanbemademoreconfidently.Auditedcostaccounts are useful in making inter-firm comparison. Thepresenceofcostaudithasagreatmoralaffectasaresultofwhichtheefficiencyispromoted.Costauditreducesthecostofproductionthroughpluggingloopholesrelatingtowastageof material, labour and overheads. Cost audit can fix theresponsibility of an individual wherever irregularities orwastagearefound.Costauditimprovesefficiencyoftheorganizationasawholeandcostingsysteminparticularbyconstantreview,revisionandcheckingorroutineproceduresandmethods.Costaudithelps incomparingactualresultswithbudgetedresultsandpointsouttheareaswheremanagementactionismoreneeded.Italsoenablescomparisonamongdifferentunitsofthefactoryinordertofindouttheprofitabilityofthedifferentunits.Costauditexercisesmoralinfluenceonemployeeswhichkeepsthemefficientandalert.Thisauditensuresthatthecostaccountshave been maintained in accordance with the principlesof costing employed in the industry concerned. It providesinformationrelatingtoweak,inefficientormismanagedunitsfortakingpropercorrectiveactionandalsohelpsto identifythesymptomsofsicknessinaunit.PracticalutilitiesofCostAuditReporttoManagement

1. Materials Consumption Inorder tocomplywith therules,aRecordof item-wise

receiptsofallmajormaterialsisnecessarysoastoincludethe following information, viz. A cursory glance of theabove would reveal the following features: Fluctuationsintherateofmaterialspurchasedfromvarioussuppliers,trend in the landed cost ofmaterials, trend in the ratesofmaterials, andabnormality in any item in any of theconsignments received. This will help the managementto explore the possibilities of changing the source ofsupply and/ormode of despatch, sales taxmanagement,developingalternativetransportiftheelementoffreightis

substantial,andChangingtheclausesofinsurancepolicy,ifcalledforetc

2. Materials Usage Thisanalysiscouldrevealthefollowingfeatures-

Abnormaldifferenceinconsumptionofanyparticularrawmaterialorprocessmaterial,abnormaldrawlsofmaterialon any particular day ormonth, identification of eventsfor excessive material consumption on some particularday, etc., keeping in view the correlation of output andinput and the knowledge of actual consumption, themanagementmaydraw‘regressioncurves’foritsin-depthanalyticalstudiesforfuturecourseofaction.

3. Cost of Services The Rules specifically demand maintenance of detailed

recordstoascertainthecostofServices/Utilitiessuchaspower, fuel,water, steam,electricity,etc.Thesedetailedinformationbreak-upscouldreflect:

Abnormalconsumptionofmaterialsusedforthegenerationof steam/hot oil, etc., under-utilisation of capacity, andtimelostduetobreakdown,andsoon.Furthermore,ifthecostissubstantial,theservicesutilisedovertheyeararereconciledwith the services generated. The factors, likeleakages,abnormallosseswouldcometolightthisway.

4. Control over expenditure Cost Audit is useful tools inManpower planning— for

reductioninsalariesandwages,Inventoryplanning—forreductionininterestcost,Maintenancescheduling—forcostcontrol,Expenditureplanning—forquality,research,etc,BudgetaryControl-forreductioninCost,CostControl

Importance of Cost audit to Shareholders/InvestorsCost audit ensures that proper records are maintained astopurchases,utilization ofmaterials and expenses incurredonvarious items i.ewagesandoverheadsetc. Italsomakessure that the industrial unit has been working efficientlyand economically. The cost audit enables shareholders todetermine whether or not they are getting a fair returnon their investments. It reflects managerial efficiency orinefficiency. Cost audit ensures a true picture of company’sstate of affairs. It reveals whether the resources like plantandmachineryarebeingproperlyutilizedornot.Costauditmakessurethatinventoryofrawmaterials,work-in-progressandfinishedgoodshavebeencorrectlyvalued.Soithelpsinprovidingtotheshareholdersaverymuchbetterpictureoftheorganisation.

Importance of Cost audit to Statutory AuditorThestatutoryauditorcanestablishthescopeandcharacterofhisauditaftercontaininganappraisalofcostingsystemusedthroughtheorganisation.

(a) Thevaluationofclosinginventoryispreparedonthebasisof cost or market price, whichever is less. Cost recordsassistthestatutoryauditorindeterminingthecostofsuchtypeofinventory.

(b) Costrecordswillbeusefulinascertainingthecorrectnessoftheremunerationpayabletoemployeesordirectorslikeapercentageofgrossprofitordepartmentalprofits.


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Importance of Cost audit to the GovernmentCostauditassiststhe‘TariffBoard’indecidingwhethertariffprotectionshouldbeextendedtoaparticularindustryornot.Ithelpstoascertainwhetheranyparticularindustryshouldbe given any subsidy in order to develop that industry. It’sprovides reliable data to the government for fixing up thesetting prices of the various commodities. Cost audit helpsthe government to take necessarymeasures to improve theefficiencyofsickindustrialunits.Itcanrevealthefraudulentintentionsofthemanagement.Coststatementsmaybehelpfultoauthorities in imposingtaxordutyatthecostoffinishedproducts(CGSTRule30).Costauditfacilitatessettlementoftradedisputesofthecompanies.Costaudit isuseful inascertainingcostclaimssubmittedtothe Government under the cost plus contract. Governmentdepartments like Railways, Defence Supplies, DirectorateGeneral Supplies andDisposals etc. aremaking use of costauditreportsforthedeterminationofcostclaims.Costauditcreatesconfidencethatthecostsstatedbythecontractorarelegitimateandaccurate.CorrectactioncanbetakenthroughtheGovernmentincasemanagementisfoundtobeweak,notefficientorcorrupt.Incaseofescalationclausebeinginvolvedinthecontract,thecontracteecanbesureregardingthecostdata if cost accounts have been audited through qualifiedcost accountants. Cost audit pinpoints the areas in whicheconomyandefficiencycanbeachieved.So, itcontributesinthedirectionofthebettermentofnationaleconomy

Importance of Cost audit to SocietyCost audit tells the true cost of production. From this theconsumermayknowwhetherthemarketpriceofthearticleisfairornot.Theconsumerissavedfromtheexploitation.Itimprovestheefficiencyofindustrialunitsandtherebyassistsin economicprogress of thenation.Soprice increaseby theindustryisnotallowedwithoutjustificationastoincreaseincost of production, consumers can maintain their standardof living. Healthy competition between dissimilar units inindustry is generated, leading proper utilisation of scarceresources.FollowingstatementoftheHRGokhaleEx-ministerofLaw,JusticeandCompanyAffairsemphasizesthesocialadvantageof cost audit. “The objective of this measure (cost audit) isto protect consumers from unwarranted increase in prices.Reasonableness of the prices charged can only be ensuredbycorrectdeterminationofcostsandthemarginchargedbyproducersandtheirretailers.Anotherobjectunderlyingthisstepistomaketheindustriescoveredbysuchrulesalertandefficientandalsotomakethemknowtheirrationalcostwithaviewtoreducingittotheextentpossible.Thusbyresortingtothismethod,theinterestofconsumerissafeguardedanditisdefinitesteptowardsremovalofsocialinjustice”.

Importance of Cost audit to Trade AssociationsSometimes,atradeassociationmayappointacostauditortoconductcostaudit:1. toascertaincomparativeprofitabilityofitsmembers;2. todetermineminimumpricetoavoidcutthroatcompetition

amongitsmembers;3. tomaintainpricesatacertainlevelsoastopreventundue

profiteering.

Importance of Cost audit to CustomerSometimes,costauditmaybeconductedonbehalfofacustomer

whenheagreestopaypriceforacertainproducton“costplus”basis. The customer in such a case gets cost accounts of theproductconcernedauditedtoestablishcorrectcostsothathemaybeable topayprice on thebasis of correct cost plusanagreedmarginofprofit.

Cost Audit & Role of CMACostauditistobeconductedbyCostAccountant(CMA),soroleofCMA is becomevery important& crucial in this competitiveera.It’snotjustauditingthecostrecordsbutindustriesexpectingbeyond the audit from CMA. Expectation of stakeholders haveincreasedfromCMAasCMAismakingthemsureaboutsecurereturnontheirinvestments,preventionoffraudandmalpractices,costcontrolsavoidingunnecessary&abnormalexpenditureetc.CMAshallpinpointstheareasinwhicheconomyandefficiencycanbeachieved.So,itcontributesinthedirectionofthebettermentofnationaleconomy.OnetheimportanceroleofCMAisdevelopment,designing&strengtheningofCostingsystemasperrequirementofindustry,somanagementisenablingtotakeintellectual,smartandeffectivedecisiononthebasisof informationprovidedfromcostingsystems.That’sisreasontosay“BehindEverySuccessfulBusinessDecision,thereisalwaysaCMA.”

ConclusionInformation is wealth and if its audited then it’s becomemore reliable, so audited cost information is become one of therequirements of current competitive era for management aswellasothersstakeholders.Thus, costaudit isneitherevilnorburdensome.Thecostauditreport,infact,canworkasa‘catalyst’totheexistingmanagementinformationsystem.

Referenceshttps://icmai.in

http://ebook.mca.gov.in

https://www.taxmanagementindia.com

https://www.iedunote.com/cost-audit

Figure: Utility of Cost Audit Information: to the Economy, Industry unit, Public


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Cost Audit Mechanism in India Vs Other CountriesCMA Virendra Chaturvedi


Cost audit is the process of ascertaining whether theproduction, marketing and Sales processes, as well asother aspects of a business, are managed in the mostCost-effectivemanner.SoCostaudit isa tool tooptimizemanagementefficiency.“‘PreventioninbetterthanCure”,Infact,costaudithelpsingettingearlywarningsignalsfortimelyremedialactions.

Any audit provides reasonable assurance about theintegrity of audited information. For example, financialaudit provides assurance to shareholders and otherstakeholders about the integrity of information providedthroughfinancialstatements.CostAuditprovideassurancefromanindependentagencyabouttheintegrityofcostandrevenueinformationthatisplacedbeforeBoardofDirectorstoanalysesofcostandrevenuedatawhichhelpincriticaldecisionsandstrengthencorporategovernance

in terms of net worth or turnover of companies, thus,restrictingitsapplicabilitytolargecompanies.

Provisions akin to Cost Audit in some Other Countries:In caseofwestern countriesandotherparts of theglobethe nomenclature “Cost Audit”” is not used but severalvariations thereof and several terminologies are coinedwhichisnothingbut“CostAudit”.AsIndiahasadoptedthebasisofTurnover.NetWorthandStockExchangeListingetc. The other countries have adopted various basis likewhetherthereisGovernmentGrantorSupportetc.InUSA,theCostAccountingStandardsaremandatoryforusebyallExecutiveAgenciesandbycontractorsandsubcontractorswhereprocurementexceedsUS$5million.Thus,thecostreportingisdoneon“set”principlesakintotheconceptofcostaudit.InUSA.oneoftheTreasuryDepartment’sordersaidthatthestateauditorshallannuallymakeacost-auditexaminationofthebooksandrecordsandmakeawrittenreportthereontothecountrylegislativeauthority.

United Kingdom (UK):To determine sustainability and worthiness of anyactivityorproject,UKGovernmentexpectstheuseoffulleconomiccostingasamoreaccuratewayofanalysis.Thefulleconomiccostshouldbecalculatednetofanyexpectedrevenues for each option. In some regulated industries,regulatorsmayrequireaccounts,statistics,businessplans,capital expenditure projections, or operating expenditurecalculations fromparticipants.Theseareused to compileanoverallpictureofthesector,forgeneralmonitoring,andsometimestosetpricecapsandotherpricecontrols.Thefocusof theRegulatorybodies ison theefficientand fairworkingofthemarketstheyoversee,andhencetheirscopeiswiderthanaccountinginformation,theusualapproachintheUKisthatapieceoflegislationwouldestablishthe

Cost audit is very relevant for companies operating in acompetitiveenvironment.Thoughoneorganizationhastoincur extra cost for Maintaining cost accounting recordsandgettingcostauditdonebutBenefitsfromcostauditaremorethanitscost.Ifacompanyisalreadymaintainingcostrecords,theincrementalcostisonlyauditfee.Thecostofregularstaff,whichsupportstheaudit,isfixedinnature.Therefore,whilethecostisimmaterial,benefitsintermsofimprovedcorporategovernanceareimmense

IndiahasgivenrecognitiontotheStatutoryCostAuditundertheCompanylawasbackasin1965.ThegovernmenthasnotifiedtheCompanies(costrecordsandaudit)Rules2014onJune30,2014.ThenewRulesmandatethemaintenanceofcostrecordsincompaniesengagedintheproductionofspecifiedgoodsinstrategicsectors,companiesengagedinanindustryregulatedbyasectoralregulatororaministryordepartmentofcentralgovernment,companiesoperatinginspecifiedareasofpublicinterestandcompaniesengagedintheproduction,importandsupplyortradingofspecifiedmedical devices. The Rules also provide for a threshold


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purposeandscopeoftheregulatorybody,andtheregulatorbody itself would determine the exact nature of theinformation it requires.Examplesof regulated industriesinUKareAirports.Communications,Education.Energy,Food standards. Pensions, Postal services. Railways,Healthcare.SocialcareandWater.

GermanyCostaccountingandCostmanagementhaveplayedamajorrole in the German competitive edge in high technologymanufacturing. The popular ERP SAP has a module onmanagementaccountingcalledControllingModulewhichoriginated only from the German company practices.Germancostingmethod focusedonmarginalcostingthatishelpfultosupportshort-termdecisions.Consideringtheapplication of cost information in public works contractmanagement, taxation and pricing, the following can besaidtobethemajor

Interestgroupsoncostandmanagementaccounting:

• Regulators

• Taxationauthorities

• Publicworkscontractdepartments

• Postalauthorities

• Corporatesector

• Management accounting departments of businessentities

• SAP as a major stakeholder in building cost andmanagementaccounting

• modulesinthesoftware,and

• Academicianfrombusinessschools

Practices Statements (MAP). MAP specifically gives thetoolstoenhancetheinternaloperationsoftheorganizationaswellastoprovideinformationtoenableshareholderstoevaluateperformanceoforganizations.

InOntario theCMAs are allowed to sign balance sheetsand profit and loss accounts like chartered accountantsandhencearesubjecttothe jurisdictionoftheSecuritiesCommission. There is no requirement to have suchinformationcertifiedbyanindependentprofessional.

Australia:InAustralia,theCostandManagementAccountinginterestgroupsexistbothinternalaswellasexternaltoabusinessentity.CostAccountingmechanismalsoexistsaspertheinsistence of some regulatory authorities. The ICMA,Australia is proposing “StrategicAudits” inAustralia forthebusinesstoadheretotheCostAccountingPrinciples.

Korea:In Korea, the Institute of Chartered Accountants hasissuedthecostaccountingstandardsapplicabletoKoreancompaniesbyamendingtheAccountingregulationin1990.The regulations clearly state that these are meant formeasuringproductcostsinpreparingfinancialstatements.More than 30 standards have been issued for adoptionandthemanufacturingcompaniesand latertothebanksand financial institutions. Korea’s Financial AccountingStandards require publication of separate schedule ofmanufacturingcostandscheduleofcostofsales.

SpainInSpain,costsystemsareessentialforcitycouncilsastheyareobligedtocalculate thecostof theservicessubject totaxation(eg.wastecollection,etc).Citycouncilsmusthaveacostsysteminplacetocalculatethecostofservices,astheyarelegallyrequirednotto‘profit’,fromtheseservices.

Canada:Canadabasicallybeingadevelopedeconomythecorporateculturesupportsbestpractices.Henceintheabsenceofcostaccountingstandards,managementaccountingguidelinesissued by CMA Canada play a major role in injectingqualityinthecostandmanagementaccountingpractices.CMA Canada also issues Management Accounting

ArgentinaInArgentinatheremovaloftariffbarrierswiththecountry’s“Mercosur”partners (Brazil,ParaguayandUruguay)hasbeen seen as stimulating competition and consequentlyincreasingthedemandforstrongcostmanagement.

BrazilTheestablishmentofasystemfortheaccuratecalculationofthecostsofproductionofgoodsandservicesmeetsthree


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requirements.

a) Compliance with the Law of PLC companies: LawNo.6404,knownasthePLCCompaniesAct,but

also applicable to other types of companies, requiresthat the accounting entries are made in accordancewithgenerallyacceptedaccountingprinciplesinBrazil.

However, the method of calculation of costs ofproductionthatrespectstheseaccountingprinciplesistheonecalled“byabsorption”.Underthismethod,allproductioncosts,directandindirect,shouldbeincludedinthecostofthefinishedproducts.

b) Compliance with Tax Law: Braziliantaxlawrequiresofthecompanytomaintain

an integrated cost management system, linked withthegeneralledger.Thisrequiresaformalizationofcostaccountingby:

1. Acostanalysissystem,

2. Classificationandaccounting,

3. Informationgenerationandeditionofmanagementreportsoncostsofproduction.

c) Addressing the needs of management: The introduction of cost accounting, which aims to

provide the management with information necessaryforcontrolling theactivity– includingthemonitoringofprofitmargins–iskeytothesuccessofanybusiness.Withsuchasystem,theissueisnotcomplyingwithlocalaccountingprinciplesorfiscalconstraints,butbringingtothemanagementreliableandrelevantinformation.

The calculationof costsmustbe supportedbyfiguresof general accounting, and must allow the monthlycalculationofthevalueofstocks.

Inthecalculationofincometaxandsocialcontributions,the only accepted method of calculating costs ofproductionisthemethod“byabsorption”.

Intheabsenceoftheintegratedsystemofcalculatingcosts “by absorption”, the tax authorities may makean arbitrary assessment of stocks of finished and in-processgoods.

JapanThey are regulations in the Cost Accounting Standards(CAS)inJapansince1962.Eventhesestandardsarenotcompulsory,manufacturersstillusethem.CASregulationsare quite relative, For instance to the classification ofoperating departments versus support ones and to theallocationofsupportdepartments.JapanCostAccountingAssociation is actually considering the revision of CASregulations in order to adapt them to new businesscircumstances.

FranceThe influence of legal obligations on accounting policywassostrongthatFrenchfirmswerereluctanttodivulgetheircostsandkeepastrongseparationbetweenfinancialandcostaccounting.Frenchcompaniestendednotchange

theircostaccountingsystems,allocatingrealcosts to theproductsviathehomogenoussectionsmethod.Butexternalinfluencesmustalsobementioned

ChinaInChina.MinistryofCommerceandMinistryofFinancearetheonlytwoRegulatoryBodiesinterestedinaccessingthecost informationofanybusinessentity.Theadoptionof 2006 Accounting System for Business Enterprises(ASBE) by the Chinese companies has made externalreportingcloser to international standards.TheRulesonCostAccounting ofPowerTransmissionandDistributionhave been published by China’s State Power RegulatoryCommission

Hong KongThe Internal Audit group in Hong Kong has developeddiagnostic tool kits to assist in enhancing operationalefficiencyandreducingcoststoimproveanorganisation’scompetitiveness. This review will produce a list ofopportunities for cost reduction/efficiency improvement,and estimated potential cost savings/improvements ifimplemented.

Thereviewsfocuson9keybusinessareas:

• GeneralManagementControl

• BillingsandReceivables

• ProcurementandPayment

• ExpenditureandExpenses

• InventoryManagement

• CashManagement

• HumanResources

• FinancialAccountingandManagementReporting

• InformationTechnology

Price control environment in various countries madea major influence on cost accounting practices. This isparticularly during the post worldwar environment andafter that during Globalization. Governments of variouscountries have traditionally played a major role in theevolutionofcostaccountingpractices.Policyintervention,administeredpricing.socialpricing,fundingplansandsoonandsoforthcouldbethereasonsforsucharole.Asaresulttheyhaveputforwarddetailedrequirementsoncostaccountinginjudicialorevenaquasijudicialform.


10

Cost Audit : Bird Eye ViewCMA Nikhil Pawar


Introduction:Inthisarticlewewilltrytounderstandcostauditrelatedimportantforms.Ihopereadersfindituseful.

CRA-1:Formsinwhichcostrecordsshallbemaintained.

Thisformprescribestheforminwhichcostrecordsshallbemaintainedanddetailedinformationabouteachelementsandtheirtreatmentsetc.

CRA-2:FormofIntimationofappointmentofcostauditorbythecompanytoCentralGovernment.

CRA-3:FormofCostAuditReport

ThisformCRA-3providesformatinwhichtheCostAuditorhastosubmithiscostauditreporttocompany.

CRA-4:Form for filing cost audit report with theGovernment.

Onthereceiptofcostauditreport fromcostauditors thecompanyhastosubmitsthesametoCentralGovernmentinformCRA-4.

TimelimittosubmitCRA-2:

The company shall inform to the cost auditor concernedofhisoritsappointmentassuchandfileanoticeofsuchappointmentwiththeCentralGovernmentwithin30daysoftheBoardMeetinginwhichsuchappointmentismadeorwithin180daysofthecommencementofthefinancialyear,whicheverisearlier,throughelectronicmodeinformCRA2alongwiththefeesasspecifiedincompanies(Registrationoffices&fees),Rules.

CRA-3: Cost Audit Report: In CRA-3, Cost Auditor needs to mention followingobservations&Suggestions:

1) Theyhave/havenotobtainedalltheinformation&explanations,whichisnecessaryforthepurposeofaudit.

2) To check & confirm, proper cost records, (as perrule 5 of the companies (CostRecords andAudit)Amendment Rule, 2014 have been/have not beenmaintainedbythecompany.

3) Tocheck&confirminformation,statementsintheannexure to this cost audit report gives/does notgivea trueand fairviewof thecostofproductionofproduct(s)/ renderingof service(s), cost of sales,marginandotherinformationrelatingtoproduct(s),service(s)underreference.

4) Detailed unit-wise & product service- wise coststatementsandschedulestheretoinrespectofthe

product/serviceunderreferenceofthecompanydulyauditedandcertifiedbyauditorare/arenotkeptincompany.

2) GeneraldetailsofCostAuditor:

Like, Category, Firms reg.no., Name, PAN, Address,E-mail ID, Membership number, name, names ofproduct(s) or service(s) with CETA Headings, SRNNO.of form CRA-2, No. of audit committee meetingattendedbyCostAuditorsduringyear,dateofsigningcostaudit,placeofsigningcostaudit.

3) CostAccountingPolicy:

Underthisdescribethecostaccountingpolicyadoptedbythecompanyanditsadequacyorotherwisetodeterminecorrectlythecostofproduction/operation,costofsales,salesrealizableandmarginoftheproduct(s)/service(s)underreferenceseparatelyforeachproducts.

Thepolicyshouldcover,interalia;thefollowingareas:

a) Identifyofcostcenters.

b) Accounting for material cost including packingmaterials, stores and spares etc., employees cost,utilitiesandotherrelevantcostcomponents.

c) Accounting,allocation&Amortizationofoverheads.

d) AccountingforDepreciation/Amortization.

e) BasisforInventoryValuation

4. Product/servicedetails(forthecompanyasawhole)

Nameofproduct(s)/service(s)

UOM CETAHeading

Whethercoveredundercostaudit

Netopera-tionalrevenue(Netoftaxes)

TotalNetRevenuefromoperation

OtherIncome

TotalRevenueasperFinancialAccounts

TurnoverasperGST

Part B

For manufacturing Sector1. Quantitative Information( for each product with

CETA Heading Separately)a) AvailableCapacity

InstalledCapacity


11

b) ActualProduction

c) ProductionasperExciseRecords

d) CapacityUtilization

e) FinishedGoodsPurchased

f) StockandOtheradjustments

g) TotalavailableQtyforsale

h) ActualSale

2) Abridgedcoststatement

2a.Detailsofmaterialconsumed.

2b.Detailsofutilitiesconsumed.

Part D: Profitability Statement 2) ProfitReconciliation(Companyasawhole)

1) ProfitorLossaspercostaccountingrecords

Add:Incomenotconsideredincostaccounts

Less:Expensesnotconsideredincostaccounts

4) Diff. in valuation of stock between financial accountsandcostrecords.

5) Otheradjustments,ifany

6) ProfitorLossasperfinancialaccounts

3) ValueadditionandDistributionofearnings.

4) FinancialPosition&RatioAnalysis(Forthecompanyasawhole)

a) FinancialPositions.

b) FinancialPerformance.

c) ProfitabilityRatios.

d) OtherFinancialRatios.

e) WorkingCapitalRatios.

5) Related Party Transactions (For the company as awhole).

6) ReconciliationofIndirectTaxes(GST)forthecompanyaswholearecoveredunderthissection.

Everycostauditorappointedassuchshallcontinueinsuchcapacitytilltheexpiryof180daysfromtheclosureofthefinancial year or submission of cost audit report, for thefinancialyearforwhichhehasbeenappointed.

CRA 4: Submission of Cost Audit ReportACompanyshallwithinthirtydaysfromthedateofreceiptofacopyofthecostauditreportshallfurnishtheCentralGovernmentwithsuchreportalongwith full informationand explanation on every reservation or qualificationcontainedtherein.


12

CFO SpeaksCMA Bhadresh V. Mehta

CMABhadreshV.MehtaACA,ACMA,ACS,DISA,IFRSwithVersatileknowledgebaseisaSeniorProfessionalinFinance,Costing,andCorporateManagement.Acompetentprofessionalwithaprovensuccessofover30yearsinsteeringFinance,Costing,Taxation,Audit,Info-tech,andauditfunctionswithreputedbusinessgroups.

HisMajorexperiences/areasareFinance, Accounts, Treasury function including Cash Flow Management, Forex Risk Management,Fund-raising,Costing,MISandBudgeting,Decisionmakingprocess,WorkingCapitalManagement,Systems&Procedures,I.T.Systems,IFRS&Audit.

HehadDevelopedand implemented&InstitutionalizedsystemofRiskAssessmentandManagement techniquesacrossallSBUs&FunctionsandreportingtheRiskStatustotheBoard.HehadverygoodknowledgeandexperienceofERPsystemsincludingSAP.

Duringhisbrightprofessionalcareer,hewonmanyawardsandmedals.HeWonaSilver MedalatInternational Essay CompetitionforEssayon‘GrowthwithoutInflation’.HealsowonBestCFOAwardfor“SustainedWealthCreation”undercategoryof“MediumCorporate”intheyear2018.HealsowonYesBank-BWBestCFOAwardsintheyear2019.

1. What do feel about your role as global CFO of a multinational company?• As a Global CFO of my company (Symphony

Limited),anIndianMNC,operatingin5differentgeographies with operating companies in India,Mexico, China, Australia and USA with differenttime-zones, I feel satisfied having successfullyperformed my roles, responsibilities, duties andobligations.

• I look back to the day I joined inDecember 2009(morethan10yearsago)andsoonbecameaCFOandstartedhandlingallCFOroleswithaneyeonthe then-recently acquired a Mexican Company(Impco S de R L de C V, Mexico) a loss makingcompany (on the verge of closure), located in aSpanishSpeakingcountry(IdidnotknowSpanishthen), which after sustained all-round efforts ofabout3yearsgotturnedaroundandthenoverpast10yearsgeneratedaprofitofoverRs.100CronaninvestmentofmerelyRs.4Cr.–atruesuccessstory.

• AnotherroleIhadplayedwithasecondacquisition,i.e. of a Chinese Company located in Dongguan,GuangdongprovinceonSouthEastChina,anotherlossmakingcompany,whichalsowecouldtaketocashbreakevenin just3years.Atpresent,duetoCovid,itissuffering,butwebelieve,itwouldbeatemporaryphase.

• Third one, a major acquisition of an Australiancompany,wasinJune2018.Wehavebeenabletobringoutlotsofimprovementsinthiscompanyaswellandstill theprocessof further improvementsandmakingthebusinessgrowareongoing.

• AsaGlobalCFO,havingbeenbestoweduponwith

varietyof rolesandresponsibilities, Ineed toandhave always been performing a 24*7*365 kind ofdutiesandresponsibilitiesandIkeepenjoyingthesame.

• Iam fortunate tohaveagooddedicated teamnotonly in India but also at respective subsidiaries(local country persons only –Mexican / Chinese /Australianetc.)butitdidrequirelotsofeffortsformetobringthemintunewithwhatwecallinourcompany“Symphonomics”,keyterm–“AddValue–ReduceCosts”abasicMantraforSuccess.

2. What are your main constraints/ challenges you face as global CFO of a multinational company?• As a global CFO, the challenges and constraints

are both local aswell as global. Local are relatedtovarietyofIndiancompliances,aneverincreasingcompetition,demandingsituations,attendingtotherequirements of each stakeholders, (beinga listedlimited company -also having variety of globalinvestorswhichincludemorethan100FIIs/DIIs,with over twenty six thousands of shareholders).Local challenges also include keeping pace withever-changing legal frameworks and frequentchangesonregulations.

• Globalchallengesandconstraintsinclude–varietyof different legal provisions in different countrieswhereoursubsidiariesarelocated–Mexico,China,Australia andUSA, their differentwork cultures,different languages, different time zones inwhichthey operate and above all different businessmodelsanddifferentscaleofoperations,processes,procedures,systemsetc.

• With frequent visits in each of these countries,


13

• He has to follow material balancing theory andmatch all material movements till the ultimatelevel.

• Hehastokeepaneyeonthecostparameters,anditsmovementsidentifytheareasofcostvariances,budget variances, and help company achieve itstargetsandbudgets.

• Hehastobeawareofglobaland localchanges inthe price movements of company’s key materialsandallinputcosts.

6. How a CMA can be helpful to industry in Cost Control and Cost Saving, specially engineering industry?• Engineering industries has uniqueness in its

different processes, and its cost parameters andmoreparticularlywhenitisacapitalgoodssupplier.The demand may vary as market forces change,and company’s production schedules or plans gohaywire.

• CMAhastobedynamicplayertocontrolcostsandletthecompanycontrolthesituationandcomeoutof the same by not only cost control but also costsavings,creatingreservestomeetthesituation.

7. What are your views about statutory cost records maintenance?• Cost records provide very useful data to the

management.• To be effective, the Cost records should not be

aperiodic or annual subject, buthas to beaday-to-day or rather transaction-to-transaction basedupdatedrecords

• Ascost(movingaveragecost)canchangewitheverytransactionandhencethecostrecordshastobealivecost,arealtimecost.

• WithERPkindofsoftware,thisistrulypossible.• MoreimportantlyCMAshavetolearnmaintaining

costrecordsonrealtimebasis,thatis,transactiontotransactionbasedlivecostrecords.

8. Does the Cost Audit create value addition for industry?• Costaudit,normallyisanannualexercise.• Ifthestatutoryauditcanbequarterlyforapplicable

companies,whycantheCostauditnotbeaquarterlyone?

• Cost audit frequencymaybe increasedwhich candefinitelyaddmorevaluestotheorganisations.

9. How the performance appraisal report by cost auditor which is laid down in earlier rules 2011 will be useful to industry?• The performance appraisal report (Form III) of

erstwhileCostAuditReportprovidedusefulanalysisofCapacityUtilization,ProductivityandEfficiencyAnalysis, Utilities and energy efficiency analysis,Contribution Analysis, Product ProfitabilityAnalysis,etc.

developing good relations, handling the situationswith congenial, cooperative, but firm attitude,developingandinculcatingsenseofresponsibilitiesin all my colleagues – be he or she is Indian orforeigner,also learning their respective languages(I leantSpanish to a great extent, andChinese alittle)—theseallhelpedmealotinovercomingtheconstraintsandmanagingandmeetingsuccessfullyallthechallenges.

3. What inspires you to pursing CMA with other professional qualifications? • Firstofall,CMAisanexhaustiveandcomprehensive

course,whichnotonlyfocusesonCostaccountsorFinancialmanagement,butonallkeyareasofthebusinessand industryofanykind,asalsoservicesector.

• The aspects (syllabus) covered in CMA courseprovidesaconceptualclarityofvarietyofbusinessscenariosandequipsCMAswithhow-todevelopastrong data analytical base and how to attend tovarietyofbusinessdecisionmakingsituations.

• CMAcoursecurriculumprepares,equips,nurturesand alsomaintains level of knowledge in CMAs ,makingthemreadytomeetwithbusinesssituations–beitprivatesectororpublicsector,orbeitindustryorservicesector.

• OverandaboveCMA,IhadchancetogetthroughCAaswellasCS.ButIjoinedCMAfirstanditdidhelpmealot,inmyprofessionalcareer.

4. How the CMA qualification helps you in your career path?• AsaCMA,fromdayone,myfocusinallsituation

hadbeentonot-onlyoncost-consciousness,rathermoreon“value-consciousness”.

• Cost is inevitable, though it can be controlled inmanysituations,buttheconceptofcostisrelativetoconceptofValueandbothhavetogotogether.

• CMAcoursehelpedmeinshapingmycareerpathtowardsgoingtotheminutestlevelineachactivity– identifyingtherootcauses,thegrassrootofthedata,thedeepermostpartoftheissueoraproblem.

• Ithelpedmeanalysingall the issueswithutmostdepthandclarity.

5. How would you evaluate the role of CMA in manufacturing industry?• Manufacturing industries has unique challenges.

Though it depends on kind of industries, varietyofprocesses,materialstoFGconversionprocesses,levels of controls at various stages, level ofautomation&ITenabledsystems,levelofadherenceto cost accounting standards, cost records, costcontrols,etc.

• CMA is well trained by our institute and havingbeen well equipped to handle all situations andanalysethecosts,financialimplications.


14

• For any company or organisation, these are veryuseful analysis and brings in limelight the trueparametersofthecompany’sperformance.

• Costauditor,may,evenifnotrequiredinthenewformofcostauditreport,continuetoprovidethisasanadditionalvitalinformationtothemanagement.

10. What are the key challenges for auditee and auditor for completing audit task under this pandemic situation of COVID?• Covid19,anunprecedentedpandemicofthecentury,

whichstartedinthebeginningof2020,hascreatedahavoc,apanicintheentireworld.Ithasaffectedeverybodyinoneortheotherway,andeventodaythesolutionisnotvisible.

• Cost auditor and the auditee both faced differentchallenges.

• Auditeehadfacedchallengesinbusinessoperationdue to extended lockdowns, and even in unlockperiods,absenteeism,productivityloss,reductioninefficiency,increasedcost,andabovealllossofsales,increasedstocksandstoragecosts,etc.etc.

• Costauditorhastofacechallengesinunderstandingthesechangessituationandanalyseitcorrectlyandsuitablyincorporateinhisauditreport.

11. What are the positives of new normal?• Governments in India – both Central and states-

have taken various effective steps to control thesituation.Wedonotdebateonlevelofeffectiveness.Butasaresponsiblecitizen,letusacceptthisNewNormalasawayoflifeandmoveforward.Lettheseobstacles be converted into Opportunities for thegrowthofourcountry.

12. Your message to young CMAs. Ihavefaithonmyprofessionalbrothers,fellowCMAs

andtheircapabilities.

Iwouldliketosay.Inbrief,just5points:

• Bealways ready to learnanddodevote sufficienttime

• Alwaysbereadytoacceptanywork-anychallengingwork

• Bepositive

• Bewhatyouwanttobe

• Be courageous but accept failure instantly andattendchallengeswithmorevigourand

• zeal.Interview by CMA Malhar Dalwadi


15

An Analytical study on financial impact of merger of Dena Vijaya bank with Bank of Baroda

CMA (Dr.) Gaurav Sharma

E-mail:[email protected]

ABSTRACT: Indian economy is witnessing of soundbanking system since creation of banking act, for thepurpose of strategic reorganization of banking sector inindia large number of significant steps have been takentowards financial and forward economic integration ofindian banking sector in India,Out of thesemajor stepsbanks have been nationalized in year of 1969 and 1980respectively,furtherwitheffectofposteconomicreformafteryearof1991bankingsectorhavebecomemorecompetitiveand rationalized due to foreign direct investment inbanking sector, software based upgradation of bankingservices,compliancesofbankingnormsetc.Inlasttwentyyearsofperiodmerger inbankingsectorhasemergedasoneofthemajorstrategictoolsfororganicgrowthofpublicandprivate sectorbanking in India.Recentlygovernmenthas announced merger of public sector banking out ofthesemergeroneofthemergerthathasbeentakenplacefrom 1st of April 2019 is merger of Dena, Vijaya bankwith bank of Baroda. Research is attempt on systematicanalysisofvariousareaofmergerwiththehelpofeffectivefinancialstatement,keyareaofperformanceanalysisandratioanalysisofmergingandmergedentityfromvariousrecognisedareaofmergerasperobjectofstudy.Key Words : Merger, Swap ratio, Merged andMergingentity,marketcapitalization,legalmanagement.

Introduction:Indian economic system is great witnessing of financialreconstruction of Indian bakingsystem, steps towardsfinancialreconsolidationinpreeconomicreformeratherewherefourteenandsixbankhasbecomenationalisedfromyearof1969and1980.witheffectofposteconomicreformthereare somany forwardstepshadbeen takenoverbygovernment towards financial reorganization of Indianbakingsystem,outofthesestepsinlasttwodecadeoftimeperiodmergerofbankingsectorinIndiahademergedasoneofthesignificantstrategictoolsforfinancialreconstructionand reconsolidation of public and private sector bankinginIndia.Inyearof2018GovernmentofIndiahasdecidedmegabankmergeroftenpublicsectorbankintofourlargepublicsectorbankingwithforwardstrategiceffortstowardsmergerofpublicsectorbanking.GovernmenthasdecidedtomergeDena,VijayabankreferredasmergingentityintobankofBarodareferredasmergedentitywhichhadtakeneffect fromAprilfistof2019.In corporate termMerger isan arrangement between two ormore entities where allthe assets and liabilities of merging entity transferredto merged entity for pre-determined swap ratio as peragreement and resolution passed by board of directorsand meeting of shareholders. In merger shareholders ofmergingentitiesgetsharesinmergedentityasperscheme

ofmerger.researchpaperisbasedonattemptoffinancial,economic,marketbasedimpactofmergerbypublicsectorbanksuchasVijaya,DenabankwithbankofBarodabywayof systematic analysis in various area of requirement ofmergeraccordingtoobjectofstudy.

Objectives of study:1. To study abouteffect ofmerger onmarket leadership

positionofmergedentitiesinbankingsectorofIndia.2. To Study about Synergies effect for economic scale

ofmergerbecauseeconomicresourcesofmergingentitiesandmergedentitywillworktogetheraftermerger.

3. ToStudyaboutpatternofNPAmanagementofmergedandmerging entities that can be carry forwarded bynewentitieshencenewmergedentitieswillgetincometaxbenefitfromprofitbenefitedaftermerger.

4. Tostudyaboutpreandpost-mergermarketstakeholdingbyshareholdersofmergedandmergingentitiesbecausein case ofmerger there are a lot of compliance, legalmanagementwillhavetocomplylikelegalrequirement,capitaladequacynorms,promptcorrectiveaction,loandisbursement and other margin requirement as perbankingactandotherprovisionoflawfortimebeinginforce.

5. To study about effect of congenericmerger to profitmakingmergingentityvijayabankanditsmarketratioarrangement inmarket position of banking sector byeffectofmerger.

Statement of problem:Inmergerprofitmakingbankalsomergedwithlossmakingbank and have to work withmerged entities. There arelotofproblemsofhumanbehaviour, cultural integration,legal and compliance basedmanagement, re stance fromemployee’ssideandsomanyfinancialandlegalissuelossin market share of merging entities, loss in pattern ofshareholding,reductioninmarketsizeetc.whicharepartofmergerinIndianbankingsectorthathavetobecompliedaftermergerbymergedandmergingentities.

Limitation of study:Study is based on financial and economic parameters ofmergerwithsystematicanalysisoffinancialstatementandratioanalysisofmergingandmergedentitiesfromaspecifictimeperiod.Therearevariousfactorsandissuesinvolvedin case of merger like non-financial issues, managementrelated issues, compliance based management, corporateandstrategiesrelatedproblems,humanbehaviour,culturalintegration related issues have not been incorporated inresearchstudy.


16

Importance of study:Mergerisoneoftheorganicmethodofgrowthforcorporateentities inresearchstudytherearevariousfinancialandnon-financial areafrom audit report market report, ratioanalysislikeprofitability,solvencyandliquidityofmergingandmergedentitieshavebeenincludedandconcludedinappropriately according to object of study. This study isalsoimportantsinanalysisofvariousareaofmergerlikeof share holding pattern, NPA management, operatingmanagement of economic of scale, capital adequacyrequirement,marketswapratiomarketanalysisofmergeronmergedandmergingentities.

Research methodology:Forsystematicanalysisandappropriateconclusionofstudyresearch methodology has been organised in followingmanner

1. datacollection:dataarecollectedfromsecondarysourceswhichconsistannual,auditreportandfinancialratiobasedanalysisaccordingtoobjectofstudyofstudy.

2. Time period: total of three years’ annual report havebeentakingintoaccountforstudyandfiveyears’ratioanalysisatdifferentlevelhavebecomeanalysed.

3. Researcharea:totaloftenrecognisedareaofeffectivebankingsystematdifferentparametershavebeentakenfromannualreportofmergingandmergedentitiesforobjectofstudy.

4. Ratio selection: from profitability, solvency, liquidity,efficiency ratio eight core ratio have been selectedaccordingtoobjectofstudy.

5. Statisticaltools:forappropriatemeasurementofresultpercentageandaveragemethodhaveapplied.

6. Swap ratio: ratio of share exchange betweenmergedandmergingauthoritiesoneffectivedateofmerger

For shareholders of Dena bank: 110 shares in bank ofBarodaforevery1000shares.

For shareholders of Vijaya bank:402 shares in bank ofBarodaforevery1000shares.

7. Effectivedateofmerger:dateonwhichmergedentityallotted shares to merging entities which is 11th ofmarch2019.

8. Lossonpost-mergertoshareholders:duetomergeronmarketvaluationdateon thebasisof closingpriceofsharesofmergingentitiesason2ndofJanuary2019willbecomelossto27%toshareholdersofDenabankand6%toshareholdersofVijayabank.

Compliance of issues in case of merger:Thereislargenumberoflistofprovisionwhichneedtobecompiledinpreandpost-mergereventsection44Aand45ofRBIact1949dealwithmergerofbankingbyreservebankofIndiaapartfromittherearesomeotherlawsthatalsoneedtobecompliedinpreandpost-mergereventwhicharefollowings.

1. ReservebankofIndiaact1949.

2. Companiesact2013.

3. Companiescourtrules1959.

4. Competitionact2002.

5. Incometaxact1961.

6. Goodsandservicestaxact2017.

7. Securitiescontractregulationact1957.

8. Rulesandprovisionofconcernstockexchange.

9. Orderandnotificationofcentralgovernment.

10.SecuritiesexchangeboardofIndiaact1992.

11.Indianstampdutyactofconcernstate.

12.Anyotheractwhichisrelevantfortimebeinginforce.

Hypothesis of study:There is no difference in actual and expected result ofvariablesinstudyinotherwordsnullhypothesis(H0)hasbeenappliedinstudyonthebasisofbelowmentionedpoint

1. Merged entity shall have become one of the largestshareinloanmarketofbankingsectorinIndia.

2. Merging entity Vijayabank and Dena bank has tosufferlossonmarketshareduetoswapratioagreedbygovernment.

3. Atter merger merged entity will comply variousbankingnormssuchascapitaladequacyrequirement,NPAmanagement,BASELnorms,marginrequirementetc.inmoreefficientmanner.

Table 01Historyofmergerinbankingsectorsinceyear2001

Year Name of merging bank

Name of merged bank

001 Bankofmaroda ICICIbankLtd.

2002 BanarasstatebankLtd. BankofBaroda

003 BankofMuscat CenturionbankofPunjabLtd.

2004 GlobaltrustbankLtd. Orientalbankofcommerce

2005 BankofPunjabLtd. Centurionbankofcommerce

2006 LordKrishnabankLtd. Centurionbankofcommerce

2006 UnitedwesternbankLtd IDBILtd.

2007 Sanglibank ICICIbank

2008 Bankofsaurastra S.B.Ibank

2009 Centurionbankofpunjab HDFCbank

2010 BankofRajasthan ICICIbank

2015 INGvsysabank KotakMahindrabank

2017 StatebankofjodhpurandBikaner StatebankofPatiyalaStatebankofHyderabad StatebankofMysoreStatebankofTravancoreMahilabank

StatebankofIndia

2019 Denabank Vijayabank

BankofBaroda

Sources: www. ICSI edu.in


17

Table 02Analysisofkeyareaofperformanceofmergedandmergingentitiesfromfinancialyear2016-2018

Areaofper-formance

Denabank Mergingentity

VijayabankMergingentity

BankofBarodaMergedentity

Employeesnumber

Total Average Total Average Total Average

41504 13835 46302 15434 160103 53368

Operatingprofit

3487 1163 7068 2355 40743 13581

Netprofitor(Netloss)

(3722) (1241) 1859 620 (6444) (2148)

Earningspershareorlosspershare

(45.45) (15.15) 17.17 5.72 (26.60) (8.67)

GrossNPA 37540 12513 19915 6638 139720 46574

NetNPA 20804 6935 13416 4472 60969 20323

GrossNPA 48.29 16.09 19.57 6.55 32.71 10.91

%ofNetNPA

28.96 9.65 13.49 4.50 15.28 5.10

CapitaladequacyBASEL%

33.48 11.16 70.68 23.55 37.54 12.51

Sources: Annual report of merging and merged entity from 2016- 2018

Table 03Particulars March

2019March 2018

March 2017

March 2016

March 2015

Average

DividendperShare

_ _ 1.20 _ _ ————

Netprofitmargin

0.86 - 5.57 3.27 - 12.24 7.91 —1.154

Returnonnetworth

0.94 -5.60 3.43 -13.42 8.53 —1.224

Quickratio 21.94 21.18 19.38 18.27 20.78 20.31

Interestincomewithtotalfundratio

2.49 2.19 1.98 1.84 1.92 2.084

Capitaladequacyratio

13.42 12.13 13.17 13.17 12.60 12.90

Advancestoloanfundratio

68.96 66.47 61.83 60.90 68.03 65.24

Financialcoverageratio

1.04 0.94 1.07 0.84 1.13 1.004

KeyFinancialRatioofBankofBarodafrom2019-2015Sources: www. Money control.com

Table 04KeyFinancialRatioofVijayaBankfrom2018-2014

Particulars March 2018

March 2017

March 2016

March 2015

March 2014

Average

Dividendpershare

1.20 1.50 - 1.50 2.00 1.24

Netprofitmargin

5.57 6.06 3.15 3.58 3.88 4.44

Returnonnetworth

7.39 10.25 5.84 7.41 7.37 7.65

Quickratio 56.32 41.03 49.90 33.80 37.18 43.65

Interestincomewithtotalfundratio

7.61 8.29 8.42 8.78 8.64 8.35


13.90 12.73 12.58 11.43 10.97 12.33

Advancestoloanfundratio

75.27 67.58 66.07 60.90 68.03 67.57

Financialcoverageratio

1.10 1.09 1.05 1.05 1.06 1.07

Table 05KeyfinancialratioofDenabankfrom2014-2018

Particulars March 2018

March 2017

March 2016

March 2015

March 2014

Average

Dividendpershare

——— ———- ——- 0.90 2.20 ———

Netprofitmargin

-21.53 -8.48 -8.78 -2.46 5.52 -7.146

Returnonnetworth

-20.89 -12.52 -13.09 3.56 7.72 -7.044

Ratioofinterestwithtotalfund

7.13 7.74 8.08 8.45 8.37 7.954


11.09 11.39 11 10.93 11.14 11.11

Quickratio 41.52 30.95 37.27 29.49 34.35 34.71

Financialchargescoverageratio

1.19 1.18 1.12 1.17 1.24 1.18

Advancetoloanfundratio

57.35 59.80 67.74 67.30 70.25 64.50

Sources: www. Money control .com.


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Table 06Analysisofswapratiopurchaseconsiderationonthebasisofsecondquarterresult2018offinancialyear2018-2019

Bankof Baroda

Dena Bank

Vijaya Bank

Merge dentity

Sharecapital 5304 22591 13042 6850

ReserveandSurplus

447031 57972 95889 634978

NETWORTH 452335 80562 108931 641828

Numberofsharesin(MN)

2646 2259 1304 3418

Swapratio NA 0.11 0.402 NA

Numberofnewshares(MN)

NA 248 524 NA

Currentmarketpricepershareoneffectivedate

119.4 17.95 51.05 NA

Currentmarketcapitalization

315875 40550 66577 408142

Currentmarketcapitalizationofmergingentityonthebassesofswap

NA 29612 62567 NA

Lossonmarketshare

NA 27% 6% NA

Sources: market report of motilaloswal securities limited

Problems and difficulties in study:1. DenaandVijayabanksareregionalbankshavingtheir

headofficesinMumbaiandsouthIndiasoamalgamationofcorporateculturalissuesisbigproblemformerger.

2. Forwagdintegrationoftoplevelmanagementandegoproblemamongexecutivestaff.

3. LosstoshareholdersofVijayabankduetoagreedswapratioofmerger.

4. recoveryofbadloansandNPAmanagementbymergedentitiesisalsoaproblem.

5. Due tomergergovernmenthas to infusednearabout5040 crore rupees to merged entities for capitalrequirement.

6. condolidation of various branch regional offices withdueprocedureofbankingnormssuchasIFCS,MICR.

branch code,CIN codeandotherbanking servicesbymergedentitiesafterpost-mergerevent.

Suggested outcomes:1. mergedentitiesshallhaveoneof the largestbanking

branch network near about 10,000 branches acrossIndiawhichwouldbehelpfulformergedentities.

2. Asperstudyofvariousreportmergedentityshallhave6.9percentshareinadvanceand7.4percentshareindepositmarketofIndianbankingsector.

3. Prompt corrective action issued by RBI to variousbank will become reduced due consolidated financialreportingofmergedentities.

4. share of government stakeholdingwill increase from63.70percentageto65.70percentageduetoinfusionofcapitalofnearabout5040croresbygovernment.

5. Duetomergermergingandmergedentitieswillworkundercontrolofsinglemanagementwhichwillbecomehelpful for management and compliance of variousbankingnormsformergedentity.

Result of hypothesis: 1. Accepted: Because after merger merged entities will

becomethirdlargestmarketshareinloanandadvancesmarketaccordingtovariousreportonmerger.

2. Accepted:Because ofmerger shareholders ofmergingentitiesDenaandVijayabankhavetosufferlossof27%and6%respectivelyonthebasisofswapratioasperclosingmarketpriceofsharesonstockexchange.

3. Accepted: Because of merged entity will become ableto manage various compliances of banking underconsolidatedmannerofmanagement.

References: www.Moneycontrol.com

www.Livemat.com.

www.Rbi.org.in

www.mca.gov.in

www.economictimes.com.

www.bankofindia.com

www.vijayabank.com.

www.denabank.com

reportofmergerofbankofbarada,denaandvijayabank2019bymotilaloswalcompanylimited

income tax act1961,section 72 to80 for assessment year2019-2020

Securitiesexchangeboardofindiaact1992

Resevebankofindiaact1949

Companyactandrules2013

About AuthorH.O.D.DepartmentofCommerce GovernmentC.L.CCollegePatan,Durg(C.G)


19

Portfolio Analysis & Visualization with Excel

CMA Manohar V. Dansingani

E-mail:[email protected]

AbstractMost investors build a portfolio without effectivelymonitoring it.With inadequate analysis, no portfolio canbeoptimal.

Excel has some extremely powerful charting functionswhichmakedecisionmakingeasier.

Just because an entire portfolio is doing reasonablywelldoesnotmeanitcannotbeimproved.

Readersareencouragedtoopenaspreadsheet&replicatetheprocessesshownhere,togainconfidence.

Goodinvestingmaybedull,butgoodinvestmentanalysiscanbeintriguing&simulating.

Note : The interested reader is requested to read the followingarticles by the author in Portfolio Organizer (PO), &TreasuryManagement (TM)–both IUPPublications, fordetaileddiscussionsontheconceptsbrieflycoveredhere:

1. CAPM:TheRiskReturnTrade-off–PO,October2015

2. PortfolioTheory&Selection–PO,April2016

3. PortfolioOptimizationwithExcel–TM,February2019

4. Making Sense of Mutual Fund Factsheets: Part I –Equity–PO,June2019

IntroductionVidya(FinanceProfessor)&Ravi(husband,Architect)wereoutfortheirmorningwalkamidstasteadydrizzleofrain.“Strangeweather”, remarkedVidya: “It’s raining even inNovember!”“Notasstrangeasour investmentportfolio. Ican’tmakemuch sense of it, except that we seem to be in positiveterritory”repliedRavi.“Ihavepreparedalistwithourcostpricewhenwestartedtheportfolio&thevaluetoday,butsomethingseemstobemissing.”

“Successful investing is anticipating the anticipation of others.”—JohnMaynardKeynes

DisclaimerNoinvestmentrecommendationsarebeingmadebytheauthor.Thisisneitheraninvitationtoinvest,noranencouragementtofollowanyparticularstyleofinvestment.

Theportfolioshownispurelyforillustrativepurposes&notasuggestion.Thereturnsshownarejustnumbersincludedatrandom,notactualreturnsontheseshares.

Everytoolisonlyasgoodasthepersonwieldingit.Thereisnoerror-prooftoolorinvestmenttheory.Allmarketinvestmentscarryrisk.

“LetusspendsometimeonourportfoliothisSunday.I’llshowyouhowanExcelsheetcanbeagreatfriendfortheaverageinvestor.”Vidyapromised.(WhatfollowsisagistoftheirdiscussionsthatSunday)

PortfolioSeemsGood:WhatNow?The first thing to remember is that the current marketpriceisnotaclearindicatorofthetotalreturnsfromourinvestments.Thecompaniesmayhavepaidoutdividends,issuedbonusshares,rightsshares…etc.Pleaseuseadjustedpricesforamoreaccuratecomparison.Table1showswhattheportfoliolookedlikeon1/11/2019.

Table1:PortfolioStatuson1-11-2019

Thislooksfine,butanadditionalcolumnmaybeaddedtoassesstheprofitorloss,asshowninTable2.


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Table2:PortfolioStatuswithProfit/Losson1/11/2019

Exceptforoneinvestmenthere,alltheothershaveshownprofits.

“A good sketch is better than a long speech” –NapoleonBonaparte.

Excel can save you frommany long speeches with someeasy,buteffectivechartingtools.

Figure1isascreenshotshowinghowtoprepareacolumnchart.

StartbyhighlightingcellsC19toG29asshownhere;nextselectthe“Insert”tabatthetop,&clickonthe“Column”tabfromthe“Charts”option.Finally,selecttheoptionbestsuitedforyourpurpose.Here,wehaveusedthefirstoption.

Figure1:Screenshot:PreparingaColumnChart

Figure 2 is the actual chart, which makes the dataabsolutelyclear.

Figure2:ColumnChartfromTable2Figure3isascreenshotshowingtheportfoliowithrelativeweights, based on the current market price. This is aninvaluableinputfordiversification&riskreduction.Pleasenote that the totalmust be 1.00 (100%), sincewehaveconsideredtheentireportfolio.

Figure3:ScreenshotofTablewithWeightsof IndividualStocksinthePortfolio

Figure 4 shows how to create a pie chart displaying theportfoliodistributionamongdifferentshares;&Figure5istheactualPieChart.

Figure4:Screenshot:PreparingaPieChartofWeightsinthePortfolio

Figure5:PieChartshowingPortfolioWeights

Woulditnotbegreattoseetheactualweightsalsointhispiechart?Excelislikeyourpersonalgenie.Nosoonersaidthandone!

Figure6isascreenshotofhowyousetupthepiecharttoshowpercentagesasintheoriginaltable.

Figure6:Screenshot:AddingPercentagestothePieChart

Figure7 isthefinaloutputwhichgivesasynopsisoftheinvestments in a visually appealing, easy to understandformat.


21

Figure7:PieChartwithPortfolioWeightsasPercentages

Nowitisabundantlyclearthatthebulkoftheportfolioisconcentratedinthreeshares,viz.L&T,Nestle,&Reliance.Thismakesiteasiertore-balancetheportfolio,orevaluatethe option of adding other shares &/or exiting existinginvestments.

The discerning reader will want more details about thereturns,notjustabsoluteprofit.HenceweaddacolumnforCAGR(CompoundAnnualGrowthRate)

Figure8isascreenshotofthetableshowingCAGR.

Figure10:BarGraphofCAGR

BetaBetaofashareisitssystematicrisk.Itisthesensitivityofreturnsonthesharetoreturnsfromthemarket.

Figure11showsthe3-yearbetaofeachoftheseshares,aswellastheportfoliobeta;whichisnothingbutaweightedaverage of betas of the individual components in theportfolio.

Figure8:ScreenshotwithCAGRColumn

CAGRiscalculatedinExcelasfollows:CAGRofL&T(heldforthreeyears)(1090000/700000)^(1/3)-1=15.91%

Itbecomesapparentnow,thatthebestperformanceisbyNestleIndiaLtd,followedbyRelianceIndustries,&soon.

Figure9explainshowtocreateachartfortheCAGRtableinFigure8,whileFigure10istheactualchartofCAGRofthisportfolio&itscomponents.

Figure9:Screenshot:PreparingaBarGraphoftheCAGRTable

Figure11:Screenshot:BetaoftheShares&thePortfolio

L&T’s beta of 1.20 indicates that in the past, when themarketwentupby10%,L&Tdeliveredpositivereturnsof12%(&whenthemarketfellby10%,L&Tgavenegativereturnsof12%).

Higher the beta, more sensitive is the stock to marketmovements.Thebetaofthemarketasawholeis1.

BetaoftheportfoliocanbecalculatedbyusingtheExcelfunction“SUMPRODUCT’asindicatedabove.

More on RiskTotalriskismeasuredbystandarddeviation.

Thisincludesbothcompanyspecificrisk,&marketrisk.

Company specific, diversifiable, unique or un-systematicriskcanbereducedbyinvestingacrosssectors,preferablythosewithlowcorrelation.

Market risk, beta, non-diversifiable or systematic riskcannotbedoneawaywith.

Giventheassumption(unproved&unlikely)thatinvestorsare rational, themarket should only reward one for themarketriskorbeta.

Caveat for BetaPlease remember: the beta we use is historical, but the


22

market is dynamic & hence beta changes every instant.Alsotherecouldbeadaily,weekly,monthlyoreven20yearbeta!

Onceagainitisclearthatnoonetoolortheorywillsufficeforsuccessfulinvestingorriskmanagement.

ManagingBeta

Youwish to invest an additional ¹ 500,000, but you alsowanttofurtherreduceyourportfoliobeta.

Wipro,Nestle&Bajaj Auto have betas of less than 1&shouldhenceservethepurpose.

However,youzeroinonNestleforthisinvestment.

The fresh status will be as shown in Table 3 (after theadditionalpurchase,ignoringtransactioncosts)

Figure1: Screenshot:PreparingaColumnChart

Figure2: ColumnChartfromTable2

Figure3: ScreenshotofTablewithWeightsofIndividualStocksinthePortfolio

Figure4: Screenshot:PreparingaPieChartofWeightsinthePortfolio

Figure5: PieChartshowingPortfolioWeights

Figure6: Screenshot: Adding Percentages to the PieChart

Figure7: PieChartwithPortfolioWeightsasPercentages

Figure8: ScreenshotwithCAGRColumn

Figure9: Screenshot: Preparing a Bar Graph of theCAGRTable

Figure10: BarGraphofCAGR

Figure11: Screenshot:BetaoftheShares&thePortfolio

******************************************************

E&OE.Withoutprejudice,withoutrecourse.

CMAManoharV.Dansingani

[email protected]

(This article was first published in Portfolio Organizer, an IUP Publication, in December 2019. Reprinted with permission)

Table3:ManagingBeta

Noticethechangeinweightsofeachshareintheportfolio,whichinturnalteritsbeta;loweringitfrom1.01to0.96

CautionExcel can help with both analysis & visualization ofinvestment portfolios. This was a preliminary discussionwithbasictools.

Caremust be taken however, to keep the big picture inmind.Thegoalistomakegoodinvestmentdecisions,basedonanaccurateanalysis ofdata.Thepurpose is certainlynot to createmore intricate tables, formulae&diagramswhichareawesome,butservelittlepurposeinoptimizinginvestmentreturns.

ConclusionRaviwassoimpressedbyVidya’sknowledge&herabilitytoexplaincomplexthingssimply,thatherequestedhertotakechargeoftheirinvestmentsfromnowon.

“Here’s to serious long-term wealth creation” he said,raisingatoasttoherwithamugofsteamingcoffee.

“Cheers!” Vidya’s eyes sparkled with happiness at beingappreciated.

******************************************************PartingThought

“Eventheintelligentinvestorislikelytoneedconsiderablewillpowertokeepfromfollowingthecrowd.”

BenjaminGraham

******************************************************Table1: PortfolioStatuson1/11/2019Table2: PortfolioStatuswithProfit/Losson1/11/2019Table3: ManagingBeta


23

Global Corporate Misgovernance Lessons - Two Case Studies

CMA (Dr.) Subir Kumar Banerjee


Every year yieldsnumber of company crisis and some ofthemhavenolinktothefinancialdisaster.Thesearebigblowstoconcernedstakeholders.Basedonstudiesofthesecorporatelivecases,allofuslearnthelessons.Thatiswhywecanputonmicroscopethereasonsofcorporatefailure.

Key Issues Behind Corporate Misgovernance1. Lack of Executive Board Effectiveness - This

happens in absence of skills and incompetence ofExecutiveBoardcoupledwithinabilityofpropersayofIndependentDirectorsonseniorexecutiveseffectively.

2. Boards’ Risk Blindness-Thisismarkedbyaboard’sinabilitytoinvolvewithkeyriskslikeriskstoreputationand“licencetooperate”,withthesameseriousnessthattheyinvolvewithrewardandopportunity.

3. Poor Leadership On Ethos And Culture -Twinstandards were applied in cases such as Maclaren’shandlingwithitsUSandUKpush-chair(babystroller)recallsandSociétéGénérale’signoringbreachoftradinglimits.

4. Defective Communication - Railtrack andNetwork Rail did not communicate productivelywith subcontractors. In the EADS Airbus A380 case,problems of mismatching aircraft sections were keptawayfromseniormanagersforsixmonths.

5. Excessive Complexity - The EADS Airbus A380project involved immense complexity at the level ofaircraft design, information technology, procurement,manufactureandassembly, inadditiontotheneedtoachieveFranco-Germanpoliticalbalancebetweentwochiefexecutives.

6. Inappropriate Incentives - BP’s bonus schemegave littlecredit forachievinggoodhealthandsafetystandards.

7. Information “GLASS CEILING” - This is pushedby failure of internal audit or risk managementteamstoreportonrisksemanating fromtop levelsofmanagement.Forinstance,warningpointedbyinternalcompliance over Kerviel’s trading patterns at SociétéGénéralehadnorepercussions.

Case No.1Corporate Misgovernance of Elon Musk, Co-Founder and CEO of Tesla Corporate Misgovernance of a personality which issometimeslargerthanlife.Elon MuskisCo-founderandCEOofTESLAMotoralongwithsomeengineersin2003,anAmericancompany.Thiscompanyisdifferentandaboveits class. Nikola Tesla, a designer, designed an electriccarin80swhensteamcarwasinuseandhencefounders

put Tesla name of the car. For future and continuousconservation of energy, company produces only Electriccars to prove that these cars run better than petrol anddieseloperatedcars.Withonecharge,itcanrunupto320km.Itisthemostpopularcaramongelectriccars.Thefirstcarcameonroadin2008.Itsproductionwas1,20,000carin2017and3,50,000in2018.Figure 1

Source-https://en.wikipedia.org/wiki/Tesla,_Inc.

Irkedbycontinuouscriticismofshortsellersofstockmarketaboutperformance of the company, on7thAugust, 2018,ElonMusk,suddenlysurprisedshareholdersandinvestorsanddeclared intweet thathewasgoingtoconvertTeslaMotor into a private company and he has managed thesufficientfundforthedeal.Accordingly,hewouldpurchasesufficient shares from the market @ $420 around $72billion.At that time,price of sharewas$280per share.Immediately,itshootupby11%forsometime.WhenaskedbySecurityExchangeCommission(SEC),whyhedeclaredthisdecisionintweeterandalsowhatisthereasonofhisnotpromptlyfilingstatutorysubmissiontoSEC?ItwasacorporategovernancefailureforTeslaMotor.Hekeptquietforalmost4daysandpublished inablogthathewas innegotiation with M.D. of Saudi Arabia Sovereign Fundandotherfunds.Healsosaidthatwhateverhedeclaredinsocialmediawasinhispersonalcapacityandnotonbehalfon the company. Further whatever he declared aboutarrangementoffundwasnotcorrect.

Figure 2


24

As per SEC rule, the concerned company (after suchunconventional declaration) need filing disclosure withinfourworkingdayswhichwasnotdone.Thefactthatfundwasreadyforthedealswasnotcorrectasdeclared.Further,it created restlessness in the concerned stock marketsand impacted heavily to the interests of shareholdersand investors.TransactionsofTesla instockmarketwasforcefully closed and share price drastically nosedived.Obviously,itcalledforsevereactionfromregulator.

Immediately,SECsentalegalnoticetobothElonMuskandTeslaMotor toappearbeforeSEC for securities cheatingandunbecomingcorporatebehaviourwhichisbadcorporategovernance.Inthetrial,SECsettledthatElonMuskwhowas holding both posts of Chairman and CEO were notcompetenttoheadacompanybecauseofhisunpredictableattitude.Considering thevast contribution ofElonMusksinceinception,insteadofbanninghimfromholdingboththeposts,theyallowedhimtoholdpostofCEOandremovedhimfromchairmanshipofthecompany.ItdirectedthatanindependentdirectortobeappointedwhowillbechairmanandElonMuskcannotbechairmanfornextthreeyears.Further,twoindependentdirectorswouldbeappointedtocontrolhimandaboardcommitteetobeformedtocheckon his impulsive and erratic behavior regarding voicingopinion which may damage shareholders and investors.UnderNOOPTIONcircumstance,ElonMuskagreedtoallclauses of agreements ofSECand resignedas chairman.Hadhenotagreedallterms,possiably,hewouldhavelostboththepositionofCEOalongwithChairmanandalongproceedingwould continue. Thatwould have jeopardizedthepresentandfutureofTeslaMotorsinceElonMuskisthebackboneofTESLAfrominceptionandmaintechnologyanddesignman.Further,SECpenalizedeachtoElonMuskandthecompanywithdamageof$20milliontotaling$40million.Afterallcametoanend,itappearsthatElonMuskgot a befitting blow fromSECwhichmay compel him toworkundersupervisionofBoard.

Lessons for SEBI and Corporates in IndiaThetaleofTESLAtellsushowduetoswiftandstringentaction of SEC, protection of shareholders’/investors’wereensured.Howalso,alargerthanlifeChairmanandCEOofTESLAMOTORwascuttosizeandputundercustodyof chairman and board of directors specifically afteradditionallyappointingonechairmanandtwoindependentdirectors.Boardandchairmanwerearmedsufficientlytosupervise the activities of tempermental CEO. It was arudeshockforCEOwhichwasverymuchrequired.

When people of stature of Ms.Chanda Kochhar andMr.RanaKapooretc.continuedeconomicoffenceslikeweakcompliances, misgovernances and miscategorisation ofNPAjeopardizingshareholder’interest,SEBIisonlysilentonlooker.Being regulator and custodian of stockmarket,such attitude of SEBI damages shareholders who investhard earned money in the stock market. SEC’s promptactionineverycaseofwrongdoingshouldbeabenchmarkof surveillence for SEBI. Otherwise the very purpose offormationandexistenceofSEBIwillbedefeated.

Case No.2Volkswagen Emissions ScandalOn 18th September 2015, the U.S. EnvironmentalProtectionAgency(EPA)detectedthatinallthemodelsofVolkswagensoldbetween2009till2015inUShademissionlevel 40 times higher than the specified EPA standardofUS agency. The concernedUSEPA issued a notice ofviolation to German automobile company Volkswagen.EPAmentioned five types of four-cylinder diesels— theAudiA3,Beetle,Golf,JettaandPassat,allofwhichhavethesameengine—initsnotice.ItalsomentionedinthenoticethatitistheresponsibilityofVolkswagentorectifythose effected 4,82,000 cars to bring back into emissionlevels.NoticealsomentionedthatVolkswagendilutedtheClean Air Act for which penalty per carmay be $37500per car totaling more than $18 billion. This was initialestimate.Actualamountmaybemore.InterestingpartiswhenthosecarsweretestedinUSEPAtestingLabs,thecarssuccessfullypassedtheemissiontest.However,whenthesamecarsweretestedbeyondtheLabs,inoutdoorandonroads,theygotdisqualifiedasperemissionstandard.

When exposed by the U.S. Environmental ProtectionAgency(EPA),Volkswagenrevealedthesecret.Therewasasoftwareinstalledineachcar.WhencarsgoinsidetheLab,thedriveractivatesparticularsoftware.Thesearespecialandqualifieddriverswhodrivecaronlyforemissiontestand know how to drive cars atminimum emission level.Thesoftwareputinthecarssuppressestheemissionslevelwhen tested in indoor lab environments and qualify andpasstheemissionbenchmark.WhenthecarcomesoutofLab, the software is deactivated. That iswhy in outdoorandinroads,theemissionlevelis40timeshighcomparedto emission standard in the indoor Lab. Volkswagenlaunchedaninternalinvestigationandrecalledasmanyas11millioncarsworldwide.

Shares in Volkswagen on the Frankfurt Stock Exchangeeventuallyhitalowof$US86.36(30%Dropinoneday),downfroma52weekhighof$US262.45.

Figure 1 Reaction After Revelation of Volkswagen Cheating Scandal

Source-https: //www.businessinsider.com.au/chart-this-is-what-happened-to-volkswagen-after-the-emissions-scandal-2015-12

Since 2008, Volkswagen introduced operation of thissoftwareinthecarsafterrevelationthatinmanycountries


25

the Volkswagen new diesel engines in different modelscouldnotqualifytheenvironmentaltest.

Figure 2 Consequences on Other EU Car Manufacturers

bad image of brandmay force a customer to shift itsloyaltyfromVXtoHonda/Toyotaetc.

3. Envirnomental issue Such action ofVolkswagenhasworsened the already

damagedthemotherearth.Thisiscriminalact.VXhasdisregardedthequalityofairitscustomersinhail.Thisisbesidesthepointofnotadhereingtovehiclenorms.

4. Corporate sustainability is a virtue for all big corporation

Volkswagen,alongwithotherMNCshaveSustainabilityReport published in Annual Report which calls formaintainingvaluesduringconductofbusinessonlongtermbasis.Publishingcolouredpamphlets containingfamous Quotes about values is one thing, practisingsame value in conducting business on long term isseparate ball game altogether. Attainment of targetslike bottomline, revenues etc. at any cost distances acompany fromrunningbusinesswithvalues.Exactly,the same has happened with Volkswagen. However,maintaining values in business has many strategicbenefitsandshouldberuthlesslyadheredto.

Reference1. https://www.bbc.com/news/business-46298999 2. https://www.sec.gov/litigation/complaints/2019/

comp24606.pdf 3. https://knowledge.wharton.upenn.edu/article/carlos-

ghosn-out-at-nissan/ 4. https://www.allaboutcircuits.com/news/4-things-

makers-can-learn-from-the-volkswagen-scandal/ 5. https://ethicsunwrapped.utexas.edu/wp-content/

uploads/2018/07/Volkswagen%E2%80%99s-Emissions-Evasion.pdf

6. https://www.techymama.com/story-behind-tesla-electric-vehicles/

7. https://hwnews.in/business-finance/business/lesson-india-tesla/59156

In response to the EPA’s disclosure, Volkswagen CEOMartin Winterkorn expressed apology to USEPA andsubsequently resigned. Seven employees have beencharged for being kingpin in this scandal. In January2017, Volkswagen acknowledged guilty in the accusationofcheatingtoUSEPA.Volkswagenpaidfineof$2.8Billion,penalty of $1.5 Billion beside a settlement fee of $15.3BillionwithUSLawAgency.Totalcomesto$19.6Billion.Amountwise, this was the highest in its class of vehiclerelatedsettlementinUSsofar.

Lessons from Volkswagen case1. Deceiving with quality of product is not viable in

the longrun. Afterscandalhasbeenexposed,lookatlikelymassive

cost, the company had to incur. Fines, litigation,compensationbesidesrecallofcars,costareinbillions.Futher,lossofbrandvalueismammoth.

2. Brand is several times valuable than product. Brandhastobebuiltovertheyearsbasedoncustomers’

trust.Customersareverysensitive.Theyhavenumberofchoicesofbrand.ThewayVolkswagenimpaireditsbrandinthisscandal,itwillbedifficulttorecover.Such


26

Can HUF make payment (Gift) to Married Daughter?

Analysis of Section 56(2)(vii) Vs. Section10 (2); Hindu Succession Act; Relevant

CMA Prutha Harshit Shah


HinduUndividedFamily(‘HUF’)hastimeandagainbeenacontroversialandgreyareaundertheprovisionsofIncometaxAct,1961(‘theAct’).Alongwithbeinganexcellenttaxplanningtool,ithasalsobeenloopedinvariouscontroversiesinvolvingtheancestralproperty,thetreatmentof incomeonthesame,thepaymentsmadetomembersofHUFandviceversa,andthelike.Nevertheless,thedepartmenthasbeen comparatively lenient in its assessment consideringthe strong foothold ofHindu SuccessionAct. After 2005,there has been a ground- breaking amendment in theHindu succession act, as per which married daughtershavebeenprovidedarightintheHUFpropertyandtotheextentthattheycandemandapartitionandexercisethatright. This complicates the intelligent tax planning donebymany.Now,peoplearebenttowardsreducingtheHUFpropertytoavoidfutureconflicts,thatmayariseduetotheamendmentofmarrieddaughtershavingaright inHUFproperty.

Incontinuanceofthisdiscussion,IwouldliketopresentaclassiccaseofcontradictioninthesectionsoftheActanditsinterpretationbythetribunalsinvariouscaselaws.

Can a fathers’ HUF give gift to married daughter of any sum above rupees fifty thousand without attracting tax liability?Followingissuesarise:

1. Whether married daughter is a member of fathers’HUF?

ProvisionsasperHinduSuccessionAct:

After 2005Amendment in theHinduSuccessionAct,1956,Adaughter continues tobea coparcener ofherfather’sfamily,havingalltherightsandprivilegesasofacoparcener,shecandemandpartitionofherfather’sHUF,property.Thismeansthatwomennowhaveequalrightsinthefamilyproperty.

2. ProvisionsasperIncomeTaxAct(Section56&Section10(2)).Therearebothsidedargumentstothis:

A: First Argument is favor of revenue, that it would betreated as income in thehands of the individual andhence,taxable.Pleasefindbelowtheissueindetail:

1. Section 56(2)(vii)isthechargingsectionwhichtreatsanyamountreceivedbyanIndividualorHUFwithoutconsideration,asIncomeundertheAct.Excerptsoftherelevantclauseisasbelow:

WhereanindividualorHUFreceives,inanypreviousyear,fromanypersonorpersons-

(a) Anysumofmoney,withoutconsideration,theaggregate

valueofwhichexceedsfiftythousandrupees,thewholeoftheaggregatevalueofthesuchsum;

Providedfurtherthatthisclauseshallnotapplytoanysumofmoneyoranypropertyreceived-

(a) Fromanyrelative;or

(b) Ontheoccasionofthemarriageoftheindividual;or

(c) Underawillorbywatofinheritance;or

(d) Incontemplationofdeathofthepayerordonor,asthecasemaybe;or

(e) FromanylocalauthorityasdefinedintheExplanationtoclause(2)ofsection10;or

(f) From any fund or foundation or university or othereducational institution or hospital or other medicalinstitution or any trust or institution referred to inclause(23C)ofsection10;or

(g) Fromanytrustorinstitutionregisteredundersection12AA[orsection12AB]

(h)Bywayof transactionnotregardedas transferunderclause(vicb)orclause(vid)orclause(vii)ofsection47.]

Explanation.-Forthepurposesofthisclause,-

[(e)“relative”means,-

(i) incaseofindividual-

(A)spouseoftheindividual;

(B)brotherorsisteroftheindividual;

(C)brotherorsisterofthespouseoftheindividual;

(D)brother or sister of either of the parents of theindividual;

(E)anylinealascendantordescendentoftheindividual;

(F)anylinealascendantordescendentofthespouseoftheindividual;

(G)spouseofthepersonreferredtoinitems(B)to(F);and

(ii) incaseofHUF,anymemberthereof;]

AspertheaboveextractoftheAct,anyamountreceived without consideration is taxable in the hands of the individual as per bare reading of the Act, in our case HUF is not ‘relative’ of the Individual, although, Individual (being members of the HUF) is a relative of HUF as per (ii) above. RulingofCaseLawinfavorofRevenue:

GyanchandM.Bardiav.ITO[2018]:

TheKartaoftheHUFmanagestheaffairsoftheHUFas


27

trusteeoftheHUFandonbehalfofothermembers.WhentheHon’bleParliamentbroughtamendmenttothestatutedeclaringgiftfrommembertoHUFastaxfree,butnotviceversa;Because, ifsuchprovisionsaremade, theKartaofHUFmaymisusetheprovisionsandgiftthecorpusoftheHUF to himself, as othermembers of the HUF have nocontrolovermanagingaffairsoftheHUF.

The legislature substituted clause (e) to Explanationin Section 56(2)(vii) defining the term of “relative” to beapplicableincaseofanindividualassesseeaswellasHUF;with retrospectiveeffect from01.10.2009.The legislaturehasincorporatedclause(ii)thereintodealwithaninstanceofanHUFdoneeonlyreceivinggiftsfromitsmembers.

ThelegislativeintentisveryclearthatanHUFisnottobetakenasadonorincaseofanindividualrecipient.Thus,theassessee’spleaofhavingreceivedavalidgiftfromhisHUFwas rightlydeclinedand impugnedadditionwas tobeupheld.

Thismeans,sinceIndividual(marrieddaughter)isreceivinggiftfromHUF,whichisnotarelativefortheindividual,anyamountabovefiftythousandrupeeswouldbeconsideredasincome in thehands of individual and taxableunder thehead“Incomefromothersources”.

B: Secondargumentisinfavorofassessee,thatHUFcangiftamarrieddaughterwithoutattractingtaxliability.Pointstobenotedasunder:

1. Section10(2):ExcerptsfromtheAct,

10. In computing the total income of a previous yearof any person, any income falling within any of thefollowingclausesshallnotbeincluded—

(2)subjecttotheprovisionsofsub-section(2)ofsection64,anysumreceivedbyanindividualasamemberofaHinduundividedfamily,wheresuchsumhasbeenpaidoutof the incomeof the family,or, in thecaseofanyimpartibleestate,wheresuchsumhasbeenpaidoutoftheincomeoftheestatebelongingtothefamily;

Hence,anysumpaidtothemembersoutoftheincomeearnedbytheHUFisconsideredas“IncomeswhichdonotformpartofTotalIncome”

2. RulingsofCaseLawsinfavorofassessee:

a. ITA No. 773/ CHD/ 2018- Chandigarh bench ofthe Income-tax Appellate Tribunal (Tribunal) Vs.SanjayGarg

Tribunalheldthattheprovisionofsection56(2)(vii)oftheActdoesnotapplytoagiftgivenbyaHUFtoitsmembers,onthepremisethatamemberhaspre-existingrightinthefamilyproperties.Thus,whenamemberreceivesanysumfromtheHUF,duringthe subsistence of theHUF or on its partition, itcannotbetreatedasreceiptwithoutconsideration.The Tribunal also held that even otherwise, thetaxpayerwas entitled to exemption under section10(2)oftheAct.

b. VineetkumarRaghavjibhaiBhalodiav.ITO[2011]12ITR(T)616(Rajkot)

(i) S.56(2)(v)exemptsgiftsfroma“relative”.Thoughthe definition of the term “relative” does notspecifically include a Hindu Undivided Family, a‘HUF” constitutes all persons lineally descendedfromacommonancestorandincludestheirmothers,wivesorwidowsandunmarrieddaughters.Asallthese persons fall in the definition of “relative”,anHUF is ‘a group of relatives’. As a gift froma“relative”isexempt,agiftfroma‘groupofrelatives’is also exempt since the singularwill include theplural;

(ii)Thegiftwasalsoexemptu/s10(2)becausethetwoconditionsrequiredtobesatisfiedforreliefviz (1)thattheassesseeisamemberoftheHUFand(2)thathereceivesthesumoutoftheincomeofsuchHUF(maybeofanearlierYear)weresatisfied.

c. Mr.BiravelliBhaskarKarimnagarv.ITO[ITANo.398/HYD/2015]

(i) In our considered view, the “relative” explainedin Explanation to s. 56(2)(vi) of the Act includes“relatives” and as the assessee received gift fromhis“HUF”,whichis“agroupofrelatives”,thegiftreceived by the assessee from theHUF should beinterpretedtomeanthatthegiftwasreceivedfromthe “relatives” therefore the same is not taxableunders.56(2)(vi)oftheAct,weholdaccordingly.”

(ii)Inviewoftheabove,respectfullyfollowingthesame,we hold that HUF can be treated as a ‘relative’undertheprovisionsofsection56(2)soastoexcludethe amount received from HUF by the assessee-individual.

Fromtheabovecaselawsciting,itisclearthatallrulingshavebeeninfavorofassesseethatgiftreceivedbyamemberofHUFisnottaxableu/s56(2)(vii)oftheAct.

Opinion and Conclusion:Thejudgementsreaffirmandstrengthentheargumentofnontaxability of gifts received by an individual from anHUFeventhoughtheActdoesnotspecificallyspeakofthesame.Therearemorerulingsinfavorofassessee.Althoughtheopiniondiffersfromcasetocase,itisacalculatedriskwhich can be taken by an assessee (HUF) by gifting anamountnotmorethanitsincomeearnedoveraperiodoftime,andafterexecutingagiftdeedandobtainingconsentfromallthemembersofconcernedHUF.

WIRC Mobile AppAndroid version:

https://play.google.com/store/apps/de-tails?id=wirc.microvistatech.com.wirc

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28

A note on Nominal & Real Cash-FlowsVishal Gupta

Registered ValuerMob.:8080943381•E-mail:[email protected]

Aproblemmostpeoplefacewhiledealingwithvaluationsistheadjustmentininflation.InflationbeingavolatilenumberinIndia,mostvaluerstendtoignoreit.Inusualpracticeweseevaluersusingnominalinterestratesandrealcashflowswithoutadjustingforinflationatall.Thisassumptionholdstruewhenpricesareveryinelasticandinflationiszero.However,mostproductsdonotfollowthisrule.

Sobeforewedelveintowhatisthecorrectwaytovaluecashflows,letusfirstunderstand the culprits in the situation–nominal& real interestratesandnominal&realcashflows.

Nominal interest rates are interest rates quoted by the agency. Forexample, if the IndianGovernment is issuing 3.15%T-Bills on 19Aug2020,thenthenominalrateofinterestofferedbytheIndianGovernmentonthoseT-Billsis3.15%.TheRealInterestRateisgivenby

Real Interest Rate = Nominal Interest Rate – Inflation

Wewillgetbacktoinflationinamoment.Regardingcashflows,thebasicmodelremainsas

Revenue = Capacity * Capacity Utilization * Sale Price

Or Revenue = Past Revenue * Growth

Withoutreallycaringaboutwherethisgrowthiscomingfrom.Aslongasthegrowth is consistentwith thepastgrowth,wearecomfortablewithourvaluation.However,itisveryimperativetoknowwhetherthegrowthisaresultofincreaseinsaleprices,orincreaseinscaleofoperations,orthemorelikelyscenario–both!Ifthegrowthisonaccountofincreaseinsalepricesonly,thenitisnota“real”growthbutonlyinnominalterms.However,ifwedonotconsiderthegrowthinsaleprices,thenitwouldbeunfairtodiscountthecashflowsatnominalinterestrates.

Theprinciplethatemergesis–Real Cash-Flows must be discounted at Real Interest Rates and Nominal Cash-Flows must be discounted at Nominal Interest Rates.

Let’s say we have a cash-flow where we’re using nominal rates. Thediscountrate is thesameasquotedby themarket in termsofnominalratesofriskfreeratesandmarketpremiums.Whereasthecash-flowsarebeingincreasedinaccordancewithinflationyear-on-year.Ifweweretoconvert the same cash-flow to real rates, wewould have to reduce thediscountratesbyinflationandtheincreaseincash-flowswouldbereducedtotheextentofinflation.Thenetvalueofthecash-flowsshouldremainthesame.WhichmakessenseasthereshouldbenoeffectofinflationontheValuationDate.Itshouldonlyaffectfuturecash-flowswhicharebeingvaluedinthediscountingmodel.

Nextweaddresstheelephantintheroom.Whatshouldbetheinflationrate.Take10differentsourcesandtheywillallgiveyouadifferentrateofinflation.Broadly,there’retwomajormeasuresofinflation–theConsumerPriceIndex(CPI)andtheWholesalePriceIndex(WPI).Inthelongrun,boththeserateshavedisplayedsimilarcharacteristics.Somemighteventake the long-term increase in gold-prices to be ameasure of inflation.However, all these measures are backward-looking and discounting ofcash-flowshastobedoneonaforward-lookingbasis.Theissueremainsunresolvedat themomentandtheclosestestimateoftentaken isa4%inflationrategiventheRBI’spresentinflationtarget.

Evenasthe issue for themeasureof inflationremainsunresolved, it isprudenttobeawarethatthediscountingofcash-flowsmustbeconsistentwiththeinterestratestaken.Otherwiseweremainunawareofourownshortcomingswhileestimatingvaluationsunderthediscountedcash-flowapproach.


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Importance of Proper Allocation, Apportionment and Absorption of Consumable Stores Expenses

CMA Rajesh Kapadia


ACompanyisrequiredtoincurexpensesonStores&SparestokeepitsPlant&MachineriesingoodconditionsothatitfacilitatessmoothrunningofitsPlant&Machinery.

ToarriveatreliableProductCost,itisessentialtoensureproperallocation,apportionmentandabsorptionofAllCostElements.

AndConsumableStoresExpensesbeingan importantCostElement, itisimperativetoensureitproperallocation,apportionmenttoRespectiveCostCentresandthereafteritsabsorptioninFinalProductCostwhichisexhibitedinAnnexureI.

ThismakesitnecessarytodefineProperCostCentres.

In Issue Voucher, proper Cost Centre should be mentioned to ensureproperbookingofConsumableStoresExpenses.

ListofCostCentresshouldbeprovidedtoAllEngineersaswellasStoresDepartment to ensurementioning of Correct Cost Centre against eachIssue Voucher. Sometimes, New Cost Centres are added to meet theManagementReportingRequirements.ThisUpdationshouldbeprovidedtoALLConcerned.

ItmaybeagoodindustrialpractisetocirculateCostCentrewiseExpensesonConsumableStorestoMaintenanceManagerregularly(SayQuarterly).

Thiswillhelpidentifybookingofexpenditureinwrongcostcentre.

MaintenanceManagerandhisstaffareadequetlyequippedtoknowanywrong booking of Consumable Stores which can be suitably corrected.It may be a good practice to analyse Cost Centrewise Expenses onConsumable Stores every quarter with previous quarter as well ascorrespondingquarterofpreviousyear.

WhenaCostingSystemisestablishedforthe1sttime:

1) Eitherintheexistingcompanyor

2) InNewCompanythen

Itwouldbeabetterpractice toeducate theall concerned including theMaintenancepeopleandStorespeopleabouttheStructureofCostCentresandtheirimportance.

ThiswillhelpandenabletheMaintenanceandStorespeopletousecorrectcostCentre.

A question may come before the management, howmany cost centrescompany should have. Experience says- neither it should be toomanyor nor too less. No of Cost Centres should be reasonable to facilitatemanagementneeds.

Toomanycostcentreswillconfusetheusersassomecostcentresmaybeoverlappinginnature.

Withtoolesscostcentres,itmaynotbepossibletoaddressthemanagementrequirement.

Sometimes, sameconsumablestoresmaybe locallyprocuredaswellasimported.

Insuchcasesitisbettertohavetwoseparatematerialcodesforbothlocalandimportedtofacilitatetohavetheirconsumptionseparately.

ItisalwaysadvisabletohaveProperCostingSystemwithProperlydefinedCost Centres to have proper allocation, apportionment& absorption ofExpensesonConsumableStores.

If the Company does not have Proper Costing System with ProperlydefinedCostCentres,thenitmaycreatePracticalProblemasenumeratedbelow:

Underthissituation,CompanymayhaveGLinFinancialAccountingforbookingofConsumableStoreswithoutassigninganyCostCentretoeachIssueVoucher.

Under this situation, if Management requires either Cost CentrewiseExpensesonConsumableStoresorExpensesforConsumableStoresforany givenCost Centre / Cost Centres, then somebody fromFinance orCostingwillhavetositwithMaintenancepersontoworkout/ascertainExpensesforConsumableStoresforrequiredCostCentreswhichwillbeverytimeconsuming.

So it is alwaysadvisable tohaveProperCostingSystemwithProperlydefinedCostCentres.

ANNEXURE I – Cost Centrewise Expenses on Consumable Stores for Company / for Plant 1YEAR 2019-20(RsLacs) % Allocation Apportionment/Absorption

COSTCENTRES InProductCostSheetitwillappearasConsumableStoresExpenses

ManufacturingCostCentres

ManufacturingPlant-1



Utilities Cost Centres

PowerPlant AllocatedtoRespectiveUtilities

InProductCostSheet,itwillappearasCostofRespectiveUtilities

Boiler

DMWaterPlant

FilterationPlant

CoolingWaterPlant

ChilledWaterPlant

AirCompressor

Nitrogen

OtherCostCentres Allocated InProductCostSheet,itwillappearasFactoryOverheads

TOTAL

NOTE:VIEWSEXPRESSEDAREPERSONALVIEWSOFTHEAUTHOR


30

Minutes of the 61st Annual General Meeting of the Western India Regional Council of The Institute of Cost Accountants of India held on Wednesday, 19th August 2020 at 3 p.m. through Video Conferencing ModeCMANeerajD.Joshi,Chairman,ICAIWIRCconductedtheproceedingsoftheAGM.Hewelcomedallthememberstothemeeting.CMANeerajJoshiChairedtheAGM.AfterestablishingQuorumforthemeetinghecalledthemeetinginorder.HeexpressedthattheCOVID19situationhasposedmanychallengesbutatthesametimehasalsopushedtheentireInstitutetoupitsITpresence.HefurtherexpressedthatthisistheFirsttimeinthehistoryofWIRCthatAGMisconductedusingOnlineMode.HethankedallthestaffmembersofWIRCfortheirsupportandalsothankedallthemembersfortheirparticipationinthefirstevervirtualAGMofWIRCofICAI.CMANeerajJoshi,ChairmaninformedthemembersthatWIRChasnotreceivedanyQueriesontheAnnualReportandWIRChasalsonotreceivedanyNoticeofProposal(underRegulation139)withintheprescribedtimelimitaspertheNoticeoftheAGM.HethenproceededwiththeAgendaofthemeeting.Agenda 1 : To receive the Western India Regional Council’s Sixty First Annual Report.CMANeerajJoshireadtheresolutioninrespectoftheAgendaItemNo.1-“RESOLVEDTHATtheSixtyFirstAnnualReportoftheWesternIndiaRegionalConstituencyofTheInstituteofCostAccountantsofIndiafortheyear1stApril,2019to31stMarch,2020,beandisherebyreceived&approved”.CMAAshishPThatte(M.No.:27543)ProposedtheResolution.CMANarharK.Nimkar(M.No.:6493)SecondedtheResolution.Theresolution&theAgendaItemNo.1werepassedbymajoritybyvoicevote.Agenda 2 : To consider and adopt the Accounts of the Western India Regional Council for the year ended 31st March 2020, together with the Auditor’s Report thereon.CMANeerajJoshireadtheresolutioninrespectoftheAgendaItemNo.2-“RESOLVEDTHATtheAuditedIncome&ExpenditureAccountoftheWesternIndiaRegionalConstituencyofTheInstituteofCostAccountantsofIndiafortheyearended31stMarch,2020,andtheBalanceSheetasatthedate,togetherwiththeStatutoryAuditor’sReportthereon,beandareherebyadopted.”CMANantyN.Shah(M.No.:31497)ProposedtheResolution.CMAVijayP.Joshi(M.No.:22286)SecondedtheResolution.Theresolution&theAgendaItemNo.2werepassedbymajoritybyvoicevote.Agenda 3 : To appoint Auditors for the year 2020-2021 and fix their remuneration.CMANeerajJoshireadtheresolutioninrespectoftheAgendaItemNo.3-“RESOLVEDTHATMr.VikasM.Vishwasrao,CHARTEREDACCOUNTANTS,BEANDAREHEREBYAPPOINTEDASauditorstoauditAccountsoftheyear2020-21,ataremunerationofRs,60,000/-perannum(plusapplicableGST)plusalump-sumoutofpocketexpensesofRs,5000/-.”CMABijalA.Panchal(M.No.:34520)ProposedtheResolution.CMANageshL.Bhagane(M.No.:29569)SecondedtheResolution.Theresolution&theAgendaItemNo.2werepassedbymajoritybyvoicevote.Agenda 4 : To transact any other business as may be brought before the meeting with the permission of the Chair.CMANeerajJoshi,ChairmaninformedthattherehasbeennorequestforAnyOtherMatterandsuchheinformedthattheagendaisconcluded.Sincetherewerenomoreagendaitems,CMANeerajJoshi,ChairmandeclaredthemeetingtobeofficiallyconcludedandclosedtheAGMofficially.71membersattendedtheAGM.CMANeerajJoshi,Chairmantheninformedthemembersthatsince2oftheCentralCouncilMembersareattendingtheAGM,itisagoodopportunitytohaveaninformaldiscussionandlistenfromthemandrequestedboththeCentralCouncilMembers,CMAAshwinDalwadi&CMA(Dr)AshishThattetoaddressthemembers.CMAAshwinDalwadisir&CMA (Dr)AshishThatte sir, informedmembersabout the initiatives of variousCommitteesat the centrallevelaswellastheupdatesfromtheCentralCouncil.CMANeerajJoshi,ChairmanthenthankedboththeCentralCouncilMembersfortheirinformationsharing.HethenexplainedinbrieftheactivitiesofWIRCovertheyearandspecificallyduringtheLockdownduetoCOVID19pandemic.HethankedtheentireteamofWIRCouncilmembers,Faculty&Stafffortheirfullcooperationduringtheyear.Hethenconcludedtheunofficialdiscussionbythankingallthemembersandwishingthemfortheirgoodhealthandsafety.


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CHAPTER NEWSNAGPUR

Office Bearers for the year 2020-21CMAAnilB.Verma – Chairman

CMADPSingh – Vice Chairman

CMAVVSMurty – Hon. Secretary

CMASameerM.Joshi – Treasurer

NAVI MUMBAI Office Bearers for the year 2020-21

CMASirishV.Mohite – ChairmanCMAVaidyanathanIyer – Vice ChairmanCMAAjayMohan – Hon. SecretaryCMASushantJ.Ghadge – Treasurer

CEP on Prospects of Registered Valuer for CMAChapterconductedaWebinaron“ProspectsofRegisteredValuerforCMA”onAugust16,2020viaGoogleMeetapp.ThespeakerforthiseventwasCMAHarshadDeshpande,RegisteredValuer&InsolvencyProfessional.CMASirishMohite,ChairmanoftheChapter,introducedthespeakerand the importance of the topic in today’s professionalworld, to the audience and the programme commencedwiththespeakerelaboratingontheconceptofValuationinIndiaandacrosstheglobe.The speaker examined the concept of Valuation whereinValuedenotes thevalueof theunderlyingassetsasonaparticulardate&alsodiscussedthevariouspointsoftheDraft Valuer Bill 2020. The speaker thenmotivated thestudents&professionals to pursue valuation as a careeroption by interpreting the examination requirements,syllabus, scope, methods of valuation – Asset approach,Incomeapproach&Marketapproachetc.Alargenumberofprofessionals&studentsparticipatedintheprogramme.The lucidpresentation& the interactiveworkshopcametoanendwiththespeakerbeingfelicitatedbyCMAVivekBhalerao,PDCommitteeChairmanoftheChapterandthevoteofthanksbeingproposedbyCMAL.Prakash,PastChairmanoftheChapter.Oral Coaching Inauguration function held on 16th August 2020ChapterconductedtheOralCoachinginaugurationfunctionWebinaronAugust16,2020viaGoogleMeetapp.TheChiefGuest for this event was Shri Sanjay Chaturvedi, HeadHR,ValvolineCumminsPvtLtdandtheGuestsofHonourwereCMARajendraKumarGupta,FinanceHead,CottonCorporationofIndiaandMsShubhadaNayak,Principal,KB Patil College Vashi. The Oral Coaching Classeswill commence from 17th August 2020 for Foundation,IntermediateandFinalforDecember2020examsandwillbeconductedonlineduetoCovid19regulations.The programme commenced with Chairman CMA SirishMohite introducing the Chief Guest and welcoming him

to the function. CMAVaidyanathan Iyer Vice ChairmanandCMAAjayMohanSecretarywelcomedthedignitariestotheprogramandintroducedtheGuestsofHonour.ThelightingofthelampwasconductedonlineatthehandsofthedignitariesamidstthesoulfulrenderingoftheInstituteAnthem which set the vibrant mood for the rest of thefunction.TheGuestsofHonourcongratulatedNaviMumbaiChapterinorganizingOnlineClassesforthebenefitofthestudentsduring the Covid19 pandemic situation and lauded theeffortsofthefaculties,managingcommitteemembersandstaff.TheChiefGuestthengaveapeptalktothestudentsontheroles of futureCMA’s and explained that Indiawill sooncelebrate the 75th anniversary of its independence andour country targets to achieveaGDPofmore than10%.CostcompetitivenessandOperationalexcellencerightfromthegrassrootsleveltothegloballevelundertheMakeinIndiainitiativewillhelpusachievethistarget.TheCMAplaysaprominentrole inachievingCost competitivenesswith a plethora of tools like Balanced Scorecard, LeanManagement,ActivitybasedManagementetcandactsasanacceleratorinnationbuildingwiththeimplementationof cost controlling techniques and effective strategicmanagement.The Guest of Honour Principal of KB Patil College MsShubhadaNayakgaveamotivationalspeechtothestudentsandurgedforanall-rounddevelopmentofpersonalityandtobethoroughlygenuine.The Guest of Honour CMA Rajendra Gupta highlightedtothestudentsthatthisCMACoursehelpsthestudentsto take up function in finance, costing, accounts andadministration.CMAB.N.SapkalcongratulatedtheChapterstudentswhopassed Foundation Exam& enrolled for Intermediate intheupcomingbatch.Hewishedthemallsuccess.Hecitedpractical examples of various opportunities available forCMA’sindifferentsectorsincludingIT,AIDataAnalyticsandstressedonupgradingtheirexistingskillstoachievesuccess.CMA L. Prakash, Immediate Past Chairman welcomedthestudentsandmentionedthatCMAcourseisoneofthebestprofessional coursesand theroleofCMAisgrowingrapidlyinthisfast-pacedworld.Hethenproposedthevoteofthanks.

PUNE 1) Independence Day - Flag hoisting ceremony Chapter celebrated Independence Day by Flag hoistingceremony on Saturday, 15th August 2020 at ICAI PuneChapter,CMABhawanpremises.CMANeerajJoshi,CCM&ChairmanWIRC,CMASujataBudhkar-Chairperson, Pune Chapter, CMA Chaitanya


32

Mohrir-RCM-WIRC, CMA Smita Kulkarni, Secretary,PuneChapter,CMAPrashantVaze-ManagingCommitteeMember, Pune Chapter, CMA Meena Vaidya, PastChairperson, Pune Chapter, CMA Dr. D. V. Joshi, PastPresident-ICAI, Members &S taff were present for theceremony.AsperHOguidelines&inviewofspreadoftheCovid-19pandemicChapterappealedtomembers&Studentsto join the Independence Day Flag hoisting programmethroughonlinevideoconferencingtool.Largenoofmembers&Studentsjoinedtheceremony.Inauguration of Oral Coaching lecturesDue to this pandemic condition of COVID-19, ChapterstartedOralCoaching throughOnlinevideoconferencingtoolfromMonday,17thAugust2020.OnthisoccasiononlineInauguralsessionorganisedbyPuneChapter.CMANeerajJoshi-CCM&ChairmanWIRC,CMAChaitanyaMohrir,RCM-WIRC, CMA Abhay Deodhar-Vice Chairman, CMAPrasadJoshi-ManagingCommitteeMember&CMARahulChincholkar-ChairmanStudentsCo-ordinationCommittee,ICAI-Pune Chapter addressed & gave important tips toFoundation,Intermediate&FinalStudentsregardinghowtoachievesuccessinCMAcourse.Webinar on ‘Recent changes & burning issues in GST’Chapter arrangedWebinar formembers on 29th August2020 on “Recent Changes & burning issues in GST”.Speaker for the session was CMA Rahul Chincholkar(PracticingCostAccountant).LecturewasveryInformativeand fruitful for participants in current situation. Verylucid lecture given by Speaker.CMAShrikant Ippalpalliwelcomed to the Speaker and participants. CMA AbhayDeodhar, Vice Chairman ICAI Pune Chapter expressedvoteofthanks.

SURAT - SOUTH GUJARAT CEP on “Opportunities in Valuation For CMAs”Chapter organized a Webinar on “Opportunities inValuationforCMAs”on2ndAugust2020throughGoogleMeet.CMABharatSavani,Chairman,CMANantyShah-Vice-Chairman presented the formal welcome address toalltheparticipants.CMAManubhaiDesai,PastChairmanof WIRC & Chapter graced the occasion with briefingmembersandshoweringthemwithblessingsandgoodluck.CMA Pankaj Kannaujiya, Secretary introduced speakerbybriefinghisprofile&achievements.CMARamMohanBhave, the founder Chairman of Surat South GujaratChapterandIFRSexpertwasthespeaker.Heguidedalltheparticipantsabout theopportunities thatCMAshavein Valuation as a Career. At the end of the session thespeaker answered the queries of the participants. About72members participated in the eventCMAKeval Shah,TreasureroftheChapterpresentedformalvoteofthanks.Felicitation of President (incharge) AT THE SGCCICMA Bharat Savani, Chairman and CMA Nanty Shah,Vice-Chairman along with the member of the managingcommittee visited the Southern Gujarat Chamber ofCommerce & Industry (SGCCI) on 8th August 2020 to

felicitatenewPresident.CMAKishorVaghela,CMAMaheshBhalala accompanied them. The Chairman on behalf ofSuratSouthGujaratChapter felicitated& congratulatedtothenewpresident(in-charge)ShriDineshbhaiNavadiyaanddiscussedonprofessionaldevelopments.74th Independence Day CelebrationBytakingallnecessarysafetyprecautions&followingtheGovernment & HQ guidelines, Chapter celebrated 74thIndependenceDayattheChapter’scampus.CMABharatSavani, (Chairman), CMA BrijeshMali (Immediate PastChairman),CMAKishorWaghela,CMAMaheshBhalala(MCMembers)andOtherMembers&studentsjoinedthecelebration.CMABharatSavanihoistedourNationalFlagandaddressedtothestudentsandmembers&staffontheoccasionof74thIndependenceDay.TheChapterofficewassuitablydecoratedaccordingtothethemeofIndependenceDay.Social Awareness Program on Female HealthChapter organized a social awareness Program on“PrecautionsandPreventionsRelatedtoFemaleHealthatVariousStagesofLife”on29thAug2020throughthegooglemeet.TheChiefGuestoftheprogramwasSmt.DarshanaJardosh,MP,LokSabha,andtheSpeakerwasDr.NamrataViradiya,M.B.D.G.O.Gynecologist&Obstetrician.TheChairman,CMABharatSavanipresentedawelcomeaddress and gave introduction of the Chief Guest tothe members. Smt. Darshana Madam highlighted theimportanceoffemalehealthinherspeechandaddedwhyit is important for overall development and governmentplans like schemes to balance the female birth ratio,schemes for female education and health. CMA BharatSavanipresentedformalVoteofthankstotheChiefGuest.Ms. Kshama Pandey- Student member of the managingcommittee introduced the speaker to the audience. Dr.Namrata commenced the session and spoke about everyaspect related to female health and answered severalquestions from themembers.Around 55members joinedtheprogramincludingfemalestudents.CEP on “Extension in GST, Income Tax, TDS & Corporate Law Compliances Due to Covid.Chapterorganizedawebinaron“ExtensioninGST,IncomeTax, TDS & Corporate Law Compliances due to COVID19”on30thAug2020throughgooglemeet.CMABharatSavani,ChairmanandCMANantyShah,ViceChairmanpresentedformalwelcomeaddresstoalltheparticipants.CMA Bhanwarlal Gurjar Vice Chairman introduced thespeaker to the participants. CMA Deepali Lakdawala(PracticingCostAccountant)was the speaker.She spokeabout how professions are being affected due to COVID19andtheextensionsmadebythegovernmenttofilethereturnsforTDS,IncomeTax,GSTandCorporateLaw.Attheendofthesessionthespeakeransweredthequeriesoftheparticipants.About50members joinedtheprograms.CMA Keval Shah, Treasurer presented formal vote ofthanks.

RNI No. 22703/72 Posted at Mumbai Patrika Channel on 10th of every month. Date of Publication is on 10th of every month.Postal Regn. No. MCS/089/2018-20 WPP License No. MR/TECH/WPP-41/South/2018-20

Printed&PublishedbyAshishkumarSureshchandraBhavsar onbehalf of theWestern IndiaRegionalCouncil of the Institute ofCostAccountantsofIndia,PrintedatM/s.SurekhaPress,A20ShalimarIndustrialEstate,Matunga,Mumbai400019.PublishedatWestern IndiaRegionalCouncil of the Institute ofCostAccountants of India,RohitChambers, 4thFloor, JanmabhoomiMarg, Mumbai400001.Editor:AshishkumarSureshchandraBhavsar.

Disclaimer1. WIRCdoesnottakeresponsibilityforreturningunsolicitedpublicationmaterial.Unsolicitedarticlesandtransparenciesaresent

inattheowner’sriskandthepublisheracceptsnoliabilityforlossordamage.2. TheviewsexpressedbytheauthorsarepersonalanddonotnecessarilyrepresenttheviewsoftheWIRCandthereforeshouldnot

beattributedtoit.3. WIRCisnotinanywayresponsiblefortheresultofanyactiontakenonthebasisofthearticlesand/oradvertisementspublishedin

thebulletin.Thematerialinthispublicationmaynotbereproduced,whetherinpartorinwhole,withouttheconsentoftheEditor,WIRC.

Theme for Coming MonthsDetails of Themes of coming months:

Month ThemeOctober DirectTaxNovember ValuationDecember InsolvencyProfession

Theme of October 2020 is Direct Tax. Editorial board invitees’ articles/papers on Direct Tax for the WIRC Bulletin for the month of Oct. 2020. Sub theme of Direct Tax is as below:

Sub Theme:• Computation of Income• TDS & TCS• Assessment Procedure• Faceless Assessment• Tax Audit• Stock valuation• Income Computation and Disclosure Standards (ICDS)• Role of CMA under Direct Tax

Regular articles/papers on other professionalmatter are also going to be published inWIRCBulletinapart fromarticles/papers on respective theme.Editorial boardalso invitees’ articles/papersonotherprofessionalmatters.

Kindlysendyourarticlesonorbefore5thOctober2020byemailtoWIRC:[email protected]

Minimum Criteria for Selection of Article/Paper for WIRC Bulletin

1. TypeofArticle:Relatedtothemeofthemonthoranyotherprofessionalmatter.

2. Font:Arial/TimeNewRoman/Calibri

3. FontSize:11

4. MinimumlengthoftheArticle:1000Words(Otherthangraphs/tables/figure/pictures)

Pls. note the final decision to consider Article/Paper is left with Chairman – Editorial Board.

theme : cost auditwirc has commenced its online oral coaching classes for the new batch. i am...

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