I) Since the CVO CA's last News and Views, the ICAI has reconsidered the applicability of AS 17 "Segment Reporting", AS 18 "Related Party Disclosure" & AS 24 "Discontinuing Operations", the implications of which are as follows :-

AS 17 : "Segment reporting"
The Council has decided that disclosure of corresponding previous years figures in the first year of application of AS 17, with respect to segment reporting, need not be required.

AS 18 : "Related Party Disclosures"
AS 18 was recommendatory in nature in respect of all enterprises. Now Council has decided to make it mandatory, only to the following enterprises:

Further, the Council has given the format for the manner in which the disclosure has to be made.

AS 24 : "Discontinuing Operations"
AS 24 was recommendatory in nature in respect of all enterprises. Now Council decided to make it mandatory in respect of accounting periods commencing on or after 1-04-2002 in respect of:
(i) Enterprises whose equity or debt securities are listed on recognized stock exchange and / or enterprises that are in the process of issuing equity or debt securities that will be listed on recognized stock exchanges in India, as evidenced by the Board of Directors' resolution in this regard.
(ii) All other commercial, industrial and business reporting enterprises, whose turnover for the accounting period exceeds Rs.50 crores.

In respect of other enterprises, the Accounting Standard would be mandatory in nature in respect of accounting periods commencing on and after 1-04-2005.

II) Further, ICAI has pronounced two Guidance Notes which as under:
Guidance Note on Audit of Companies Carrying on General Insurance Business:
The ICAI has issued Revised Guidance Note on Audit of Companies carrying on General Insurance Business, specifying a number of changes in the operations, working, etc. and the format and disclosure requirements in the financial statements of Insurance Companies. In short, Guidance Note has been made more industry specific.

Guidance Note on Audit of Companies Carrying on Life Insurance Business:
Guidance Note on Audit of Companies carrying on Life Insurance Business, besides discussing the requirements of the Insurance Regulatory and Development Authority on the operations and functioning of life insurance business, also discusses the important aspects of accounting for Life Insurance Companies. The Guidance Note also provides extensive guidance on the important audit considerations relating specifically to Life Insurance Companies.

III) Format of Audit Report
The ICAI has decided to change the Audit Report, It should now include, in the opening (introductory) paragraph, a Statement that the financial statements are the responsibility of the entity's management and a Statement that the responsibility of the Auditor is to express his opinion on the financial statements based on the audit, which is as follows:

Auditor's Report to the Members of (Name of the Company) :
We have audited the attached Balance Sheet of (Name of Company), as at 31st March, 2002 and also the Profit and Loss Account for the year ended on that date annexed thereto. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We have conducted our audit in accordance with Auditing Standards generally accepted in India. These Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

Except the above paragraph all other contents of the Report are same as old Report.

IV) ICAI has pronounced, Statement on Peer Review which is as under:

Statement on Peer Review

Introduction : The Institute has issued Statement on Peer Review. The basic purpose of the Peer Review is to serve as a mechanism intended to further enhance the quality of professional work of practicing Chartered Accountants over a period of time, thereby ensuring that the profession of Chartered Accountancy continues to serve the society in the manner envisaged.

Scope of Peer Review : Once a practice unit is selected for review, its attestation and engagement records pertaining to the immediately preceding three completed financial years, shall be subject to review, provided that the records of audit reports/attestation services relating to years prior to the accounting year beginning from 1.04.2002 shall not be subject to review.

1. The Review shall focus on :
i) Compliance with Technical Standards.
ii) Quality of Reporting.
iii) Office systems and procedures with regard to compliance of attestation services, systems and procedures
iv) Training Programs for staff (including Articled and Audit Clerks) concerned with attestation functions, including appropriate infrastructure.

Members/ Firms Subject to Review : Peer Review will be introduced in three stages with different types of practice units being included in each stage. Implementation will proceed on the basis of random selection from the practice units included in each stage. The Board shall decide the proportion of practice units to be included in the selection during each phase of implementation.
Practice units, which shall be covered under each stage, are listed below:

Stage - I : Large Firms appointed as Central Statutory Auditors of Banks, FIIs, Societies, Insurance Companies etc. and Auditors of Other Large Companies having paid up Capital of over Rs. Five Crores and an annual turnover of more than Rs. Fifty Crores. The implementation of this stage will be initiated from 1st April 2003.

Stage - II : Medium Sized Firms conducting Statutory Audits of branches, Audit of certain NBFCs, Audit of Companies having paid-up Capital of Rs. Five Crores or less and such other criteria such as turnover etc. as may be decided by the Board, Audit of Concerns which have raised funds from Public/Financial Institutions of over Rs. One Crore at any time during the period covered by the review.

The implementation of this stage will be initiated from 1st April 2004.

Stage III : All other practice units selected on random sample basis. The implementation of this stage will be initiated from 1st April 2005.

Provided that if a practice unit is not selected in any of the above three stages, it may suo moto apply to the Board for the conduct of its Peer Review, and the Board shall take due cognizance of such request.

The Peer Review Board may alter/change/modify any of the above criteria, with prior approval of the Council

Periodicity of Peer Review : The Peer Review of the various practice units falling under Stage I should be mandatorily carried out at least once in a block of three years. However, if the Board so decides or otherwise, at the request of the practice unit, the Peer Reviews for a practice unit can be conducted at shorter intervals.

Cost of Peer Review : The cost of Peer Review including honorarium and TA/DA for reviewer and his qualified assistant(s), as may be decided by the Board from time to time, shall be borne by the practice unit.

V) ICAI has also pronounced, Revised AS 7, which is as under :
Revised Accounting Standard (AS) 7 is applicable in respect of all contracts entered into during accounting periods commencing on or after 1-4-2003 and is mandatory in nature from that date. Accordingly, Accounting Standard (AS) 7, 'Accounting for Construction Contracts', issued by the Institute in December 1983, is not applicable in respect of such contracts. Early application of this Standard is, however, encouraged.

Revised AS-7 permits to adopt only "the percentage of completion method'' while accounting for contracts in their financial statements. Thus contractors will have to follow only Mercantile System of Accounting.

Contract revenue is measured at the consideration received or receivable.

Recognition of Contract Revenue and Expenses

When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. An expected loss on the construction contract should be recognised as an expense immediately.

Combining and Segmenting Construction Contracts
Treat each asset as separate contract,
• separate proposals have been submitted
• each asset has been subject to separate negotiation and the contractor and customer have been able to accept or reject that part of the contract relating to each asset; and
• The costs and revenues of each asset can be identified.

A group of contracts, whether with a single customer or with several customers, should be treated as a single construction contract when:
• the group of contracts is negotiated as a single package;
• the contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit margin; and
• the contracts are performed concurrently or in a continuous sequence.

Contract costs should comprise:
• costs that relate directly to the specific contract;

• costs that are attributable to contract activity in general and can be allocated to the contract; and
• such other costs as are specifically chargeable to the customer under the terms of the contract.

Costs that relate directly to a specific contract include:
a. site labour costs, including site supervision;
b. costs of materials used in construction;
c. depreciation of plant and equipment used in the contract;
d. costs of moving plant, equipment and materials to and from the contract site;
e. costs of hiring plant and equipment;
f. costs of design and technical assistance that is directly related to the contract;
g. the estimated costs of rectification and guarantee work, including expected warranty costs; and
h. claims from third parties.

These costs may be reduced by any incidental income that is not included in contract revenue.

Costs that may be attributable to contract activity in general and can be allocated to specific contracts include:
• insurance;
• costs of design and technical assistance that is not directly related to a specific contract; and
• construction overheads.

Costs that cannot be attributed to contract activity or cannot be allocated to a contract are excluded from the costs of a construction contract. Such costs include:
• general administration costs for which reimbursement is not specified in the contract;
• selling costs;
• research and development costs for which reimbursement is not specified in the contract; and
• depreciation of idle plant and equipment that is not used on a particular contract.

(i) When the outcome of a construction contract can be estimated reliably
When all the following conditions are satisfied:

(A) In the case of a fixed price contract.
• total contract revenue can be measured reliably;
• it is probable that the economic benefits associated with the contract will flow to the enterprise;
• both the contract costs to complete the contract and the stage of contract completion at the reporting date can be measured reliably; and
• the contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates.

(B) In the case of a cost plus contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied:
• it is probable that the economic benefits associated with the contract will flow to the enterprise; and
• the contract costs attributable to the contract, whether or not specifically reimbursable, can be clearly identified and measured reliably.

Under the percentage of completion method, Contract revenue is recognised as revenue in the statement of profit and loss in the accounting periods in which the work is performed. Contract costs are usually recognised as an expense in the statement of profit and loss in the accounting periods in which the work to which they relate is performed. However, any expected excess of total contract costs over total contract revenue for the contract is recognised as an expense immediately.

(ii) When the outcome of a construction contract cannot be estimated reliably:
• Revenue should be recognised only to the extent of contract costs incurred of which recovery is probable; and
• Contract costs should be recognised as an expense in the period in which they are incurred.
• An expected loss on the construction contract should be recognised as an expense immediately

(A) In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied:
• total contract revenue can be measured reliably;

• it is probable that the economic benefits associated with the contract will flow to the enterprise;
• both the contract costs to complete the contract and the stage of contract completion at the reporting date can be measured reliably; and
• the contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates.

(B) In the case of a cost plus contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied:
• it is probable that the economic benefits associated with the contract will flow to the enterprise; and
• the contract costs attributable to the contract, whether or not specifically reimbursable, can be clearly identified and measured reliably.

Disclosure
• the amount of contract revenue recognised as revenue in the period;
• the methods used to determine the contract revenue recognised in the period; and
• the methods used to determine the stage of completion of contracts in progress.

An enterprise should disclose the following for contracts in progress at the reporting date:
a. the aggregate amount of costs incurred and recognised profits (less recognised losses) upto the reporting date;
b. the amount of advances received; and
c. the amount of retentions.

An enterprise should present:
• the gross amount due from customers for contract work as an asset; and
• the gross amount due to customers for contract work as a liability.

VI) AS 20 Clarification
As clarified by ASB, now AS 20 will be applicable to all the Companies, as they are required to give information under Part IV of the Schedule VI to the Companies Act, 1956. All the companies should calculate and disclose earnings per share in accordance with AS 20, whether its equity shares or potential equity shares are listed on a recognised stock exchange in India or not