ICMAI releases FAQs on Maintenance of Cost Records and Audit Under Companies Act 2013

The Institute of Cost Accountants of India (ICMAI) has released Frequently Asked Questions (FAQs) on the Maintenance of Cost Records and Audit Under Companies Act 2013.

The Technical Cell issued the Frequently Asked Questions (FAQs) on the maintenance of Cost Records and Audit thereof in terms of the Companies (Cost Records and Audit) Rules 2014 (CCRAR, 2014).

The Ministry of Corporate Affairs has notified numerous revisions to the CCRAR 2014 throughout time. Other developments included discussions with the Ministry, the Technical Cell’s experience with pertinent issues, and sectoral consultations under the Rules.

In light of the above, the Technical Cell of the Institute decided to review all the FAQs issued and accordingly, after a lot of deliberations, the Technical Cell has come out with a compilation of thoroughly revised FAQs in supersession of the previous three tranches of FAQs issued on the CCRAR, 2014.

The FAQs are as follows:

1. Which Rules govern the maintenance of cost accounting records and cost audits as per Section 148 of the Companies Act, 2013?

The Central Government issued Companies (Cost Records and Audit) Rules, 2014 on June 30, 2014. Since then the said Rules have been amended many times. The Companies (Cost Records and Audit) Rules, 2014 as amended till date govern the maintenance of cost accounting records and cost audits as per Section 148 of the Companies Act, 2013.

2. What is the applicability of the Companies (Cost Records and Audit) Rules, 2014 and what is the date on which it becomes effective and applicable?

a) The Rules have classified sectors/industries under Regulated and Non-Regulated sectors. The sectors/industries covered under Table A of the Rules are under the Regulated Sector and sectors/industries covered under Table B are under the Non-Regulated Sector.

b) Every company, including foreign companies defined in clause (42) of section 2 of the Act, engaged in the production of the goods or providing services, specified in Tables A and B, having an overall turnover from all its products and services of rupees thirty-five crore or more during the immediately preceding financial year, shall be required to maintain cost accounting records.

However, foreign companies have only liaison offices in India and are engaged in the production, import and supply or trading of medical devices listed in Sl. 33 of Table B are exempted.

Further, companies which are classified as a micro-enterprise or a small enterprise including as per the turnover criteria under sub-section (9) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006) are also excluded from the purview of the Rules.

c) The Rules are effective from April 1, 2014, in respect of a certain class of companies and for the others it is effective from April 1, 2015, as detailed below:

1. Every company covered under the rules including all units and branches thereof, shall, in respect of each of its financial years commencing on or after the 1st day of April 2014, maintain cost records in form CRA-1.

2. However, for a company covered in serial number 12 and serial numbers 24 to 32 of item (B) of rule 3, the requirement under this rule shall apply in respect of each of its financial years commencing on or after the 1st day of April 2015.

To read more refer to official FAQs given below.

3. What constitutes the cost records under Rule 2(e)?

As per Rule 2(e) of the Companies (Cost Records and Audit) Rules, 2014, “cost records” means ‘books of account relating to utilization of materials, labour and other items of cost as applicable to the production of goods or provision of services as provided in section 148 of the Act and these Rules’. There cannot be any exhaustive list of cost accounting records. Any transaction – statistical, quantitative or other details – that has a bearing on the cost of the product/ activity is important and forms part of the cost accounting records.

Cost records are to be kept on a regular basis in compliance with the provisions contained in CRA-1 of the notified rules.

4. The Rules state that cost records are to be maintained in Form CRA-1. However, CRA-1 does not prescribe any format but only provides principles to be followed for different cost elements. What are the role and status of Cost Accounting Standards/GACAP and its applicability vis-à-vis CRA-1?

The principles of maintenance of cost accounting records have been notified in the Rules in CRA-1. The word “Form” here does not denote format; it means the form containing principles for the maintenance of cost records. The principles are in sync with the cost accounting standards. The Rules are principle-based based and no formats have been prescribed for the maintenance of cost accounting records like pre-2011 industry-specific rules.

Companies can maintain cost accounting records according to their size and nature of business so long as it determines a true and fair view of the cost of production, cost of sales and margin of the products/ services.

5. What is the difference between a Cost Accounting policy and Cost Accounting system?

The Cost Accounting Policy of a company states the policy adopted by the company for the treatment of individual cost components in cost determination for drawing its cost statements.

The Cost Accounting system of a company, on the other hand, provides a flow of cost accounting data/information across the activity flow culminating in arriving at the cost of the final product/service.

6. How to identify products covered under a 4-digit CTA Code as mentioned in the Rules?

Customs Tariff Act Heading has been defined in Rule 2(aa) of Companies (Cost Records and Audit) Rules 2014 as amended. It states “Customs Tariff Act Heading” means the heading as referred to in the Additional Notes in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975).

The First Schedule to the Customs Tariff Act 1975 states – that “heading”, with respect to goods, means a description in a list of tariff provisions accompanied by a four-digit number and includes all sub-headings of tariff items the first four digits of which correspond to that number.

7. The Rules prescribed in 2011 introduced the concept of reporting under “Product Group”. The present Rules are silent about Product Group. What is the requirement for the preparation of cost statements of products/services so far as maintenance of cost accounting records is concerned and reporting thereof in the cost audit report?

The concept of “Product Group” has been dispensed with in the 2014 Rules. The cost records referred to in sub-rule (1) of Rule 5 are required to be maintained on a regular basis in such a manner as to facilitate the calculation of per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities. Hence, it is imperative that the cost accounting records are maintained and cost statements prepared for each and every product/service/activity that the company is engaged in.

So far as reporting is concerned, an Abridged Cost Statement for every product identified with the CTA Code is required to be provided. For activities/services for which the CTA Code is not applicable, the Abridged Cost Statement shall be for each service/activity.

8. The Tables listing the industry /sector/product/service in the Rules have described the same by way of description as well as CTA Heading, wherever applicable. For certain sectors, the coverage under the CTA Heading is apparently not in line with the description of the sector. How to determine the coverage in such cases?

The description and the CTA Heading have to be read harmoniously and construed to supplement each other. The CTA Codes are inclusive and all products covered under the codes are covered irrespective of the description. However, in certain cases, in addition to the CTA Codes, the description denotes the activities relating to the said CTA Codes covered under the Rules.

For example, in the case of the Petroleum Industry, the description states, “Petroleum products including activities regulated by the Petroleum and Natural Gas Regulatory Board under the Petroleum and Natural Gas Regulatory Board Act, 2006 (19 of 2006)” and the CTA Headings are 2709 to 2715. Hence, all products covered under CTA Headings 2709 to 2715 are included as well as activities like storage, transportation and distribution of Crude Oil or Gas etc. and any other activity that is defined under the Petroleum and Natural Gas Regulatory Board Act, 2006 and regulated by the PNGRB are covered.

Similarly, Rubber and allied products would include all rubber products as specified under CTA Codes 4001 to 4017 and will not be restricted only to such rubber products regulated by the Rubber Board.

Companies engaged in manufacturing Machinery and mechanical appliances falling under CETA Codes 8401; 8801 to 8805; 8901 to 8908 are similarly covered irrespective of its ultimate customer/consumer, subject to the company meeting the threshold limits prescribed and it is not necessary that the products have to be exclusively used in defence, space and atomic energy sectors.

9. What are the duties of the Companies in relation to provisions of Section 148 of the Companies Act, 2013 and the Rules framed thereunder?

Every company required to get cost audit conducted under Section 148(2) of the Companies Act, 2013 shall:-

a) Appoint a cost auditor within one hundred and eighty days of the commencement of every financial year;

b) Inform the cost auditor concerned of his or its appointment;

c) File a notice of such appointment with the Central Government within a period of thirty days of the Board meeting in which such appointment is made or within a period of one hundred and eighty days of the commencement of the financial year, whichever is earlier, through electronic mode, in form CRA-2, along with the fee as specified in Companies (Registration Offices and Fees) Rules, 2014;

d) Within a period of thirty days from the date of receipt of a copy of the cost audit report, furnish the Central Government with such report alongwith full information and explanation on every reservation or qualification contained therein, in form CRA-4 along with fees specified in the Companies (Registration Offices and Fees) Rules, 2014.

e) Maintain cost accounting records by all units and branches for the products covered under the Rules as per the principles stated in CRA-1. (Rule 5)

f) Prepare the Cost Statements including other Statements as per Annexure to CRA-3, approve by the Board of Directors, and submit to the cost auditor to report thereon. (Rule 6 (3B))

g) Board of Directors to consider and examine the report of the cost auditor, particularly any reservation or qualification contained therein. (Rule 6(5))

h) Invite the cost auditor to attend the Audit Committee meeting and Board meeting to discuss & present the cost audit report.

i) Board of Directors to comply with the provisions of sub-section (12) of section 143, as applicable.

10. Is a cost auditor required to audit and certify monthly, quarterly, half-yearly and yearly cost statements?

As per Rule 5, every company under these rules including all units and branches thereof is required, in respect of each of its financial years, to maintain cost records in form CRA-1. The cost records are required to be maintained on a regular basis in such a manner so as to facilitate the calculation of per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly or quarterly or half-yearly or annual basis. The cost auditor is appointed to conduct an audit of the cost records and make a report thereon for the financial year for which he is appointed. It is not incumbent upon the cost auditor to certify monthly, quarterly, or half-yearly cost statements.

To Read More Download Official FAQs Given Below: