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Cost Records & Accounting Rules Amended!

Published on Tue, Jan 13,2015 | 17:16, Updated at Tue, Jan 13 at 17:16Source : Moneycontrol.com 

By: V. Balaji, Partner, Deloitte Haskins & Sells

Cost records and cost audit under the Companies Act, 2013 and the Rules thereunder

The Companies (Cost Records and Audit) Amendment Rules, 2014 issued on December 31, 2014 has made some significant changes to the rules earlier prescribed in June 2014.

These amendments have:

•    Brought in a single turnover threshold of Rs. 35 crores in the immediately preceding financial year for maintenance of cost records in case a company deals with any of the specified products / services. This will simplify determination of requirement to maintain cost records as there is only one threshold criteria that has been specified.

•    Specified the products for which cost records are required to be maintained based on the individual headings under the Central Excise Tariff Act (CETA).

It may be noted that the cost accounting rules issued under the Companies Act, 1956 had referred to the chapters of CETA for specifying the products covered for maintenance of cost records. Such classification was not prescribed in the rules issued in June 2014under the Companies Act, 2013 (the 2013 Act). The amended rules have taken the classification based on CETA one step further and has specified the individual product heading to which the cost records would apply. This is expected to bring further clarity relating to the products that are covered under the rules.

•    Increased the scope of products covered for maintenance of cost records by the inclusion of a further 10 categories of products. These 10 products are tea and coffee, milk powder, insecticides, plastic and polymer, tyres and tubes, papers, textiles, glass, other machinery and electrical and electronics machinery.

Whilst the requirement for maintaining cost records is applicable from April 1, 2014, there is a deferment of this requirement with respect to the 10 new products that have been specified in the amendments made in December 2014. For these 10 products the requirements for maintaining cost records will be applicable from April 1, 2015.

•    Removed the net-worth based criteria for cost audit that was specified in the rules issued in June 2014. The amended rules now require cost audit based on whether the company operates in a regulated sector or a non-regulated sector and based on the specified thresholds with respect to the overall turnover of the company and the aggregate turnover of the specified products, respectively. The revised thresholds are as under:
-    Regulated sector - audit required if the overall annual turnover from all its products and services during the immediately preceding financial year is Rs.50 crore or more and the aggregate turnover of the individual product(s) or service(s) for which cost records are required to be maintained is Rs.25 crore or more.
-    Non-regulated sectors - audit required if the overall annual turnover from all its products and services during the immediately preceding financial year is Rs.100 crore or more and the aggregate turnover of the individual product(s) or service(s) for which cost records are required to be maintained is Rs.35 crore or more.

Cost records form part of the books of account of the company under the 2013 Act. Further, the cost auditor is also required to state if the company has an adequate system of internal audit of cost records. Therefore, it is important that boards and audit committees also specifically review compliance with the requirements for maintaining cost records and also consider including in the scope of internal audit a review of the cost records. The need for filing a compliance report by the companies for maintenance of cost records has not been specified.

Rule 5 of the Companies (Cost Records and Audit) Rules, 2014, inter alia, requires the cost records to be maintained in such manner so as to enable the company to exercise, as far as possible, control over the various operations and costs to achieve optimum economies in utilisation of resources. This requirement aligns with the board’s responsibility on internal financial controls specified in the 2013 Act which, inter alia, requires the boards to establish and operate an appropriate internal control system that ensures efficiency in operations.

The rules apply to all specified companies dealing with the specified products. Whilst exemption from maintaining cost records has been given to micro and small enterprises and education services which are carried out as philanthropy, a similar exemption has not been provided for health care services that are carried out as philanthropy.

Whilst an additional responsibility has been cast on the cost auditor, primarily with regard to reporting on any fraud in the Company, pursuant to the changes made in the 2013 Act, the 2013 Act and the Rules thereunder have otherwise maintained consistency in the principles relating to maintenance of cost records and cost audit as compared to the Companies Act, 1956.

 
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