Tag: accounting

Income Taxes: ICAI issues exposure draft of revised Accounting Standard

Banking & Finance

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The CA Institute has come up with an exposure draft for a revised accounting standard on income taxes, to be applicable on entities that are not required to adopt the Indian Accounting Standards (Ind AS) notified by the Corporate Affairs Ministry.

Currently, all listed companies and unlisted companies – with a networth of ₹250 crore and above – are required to adopt the Ind AS. For other corporate and non-company entities, the accounting standards specified by the CA Institute are applicable.

The latest move follows the decision of the various standard setting forums – the Accounting Standards Board (ASB) of ICAI, the NFRA and the Ministry of Corporate Affairs (MCA) – to revise accounting standards.

‘Underlying principles’

“Accordingly, the ASB of ICAI has embarked on the process of upgradation of these standards which will be applicable to the entities to whom the Ind AS are not applicable,” sources said. The objective behind the revision is to ensure that underlying principles are not too different between the Ind AS entities and the other entities.

The exposure draft on Accounting Standard for Income Taxes (AS 12) is the latest among the several standards that are proposed to be revised. The entire set of revised standards are expected to be implemented at one go in a future date and the timeline for this is not yet decided. June 10 is the last date to send comments on the exposure draft. The CA Institute has specified June 10 as the last date by when comments can be sent on the exposure draft.

“For the accounting standard on income taxes, there will not be much change. Whatever standard one is following, almost the same position will continue for entities that are not adopting Ind AS,” sources said.

The proposed revision, which will impinge on public sector banks, certain insurance companies and entities that function as partnerships, will not fully align itself to the Ind AS 12 as the guidance given to ASB by the Central council is not to change the position of existing accounting standard on income taxes (AS 22) to that of Ind AS 12.

One of the main change in the revised accounting standard on income taxes, as against the existing AS 22, will be on the aspect of recognition of deferred taxes. Earlier, when there was unabsorbed depreciation or carry forward losses, there was a question whether deferred taxes should be recognised and will there be future profit to realise the deferred taxes.

“Now although the outcome would be the same, the language has been aligned to Ind AS 12 wherein one has to see the probability of getting profits in the future, reasonable certainty and there is also guidance to determine whether the entity would have profits to realise the deferred tax assets,” sources added.

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RBI to banks: Ensure authority, stature, independence, resources to internal audit function

Banking & Finance

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The Reserve Bank of India (RBI) has asked banks to ensure that the internal audit function has sufficient authority, stature, independence and resources within the bank to enable internal auditors to carry out their assignments with objectivity. It also emphasised that this function cannot be outsourced.

These directives are aimed at strengthening governance arrangements in banks under the Risk-Based Internal Audit (RBIA) Framework.

The central bank said the Head of Internal Audit (HIA) should be a senior executive of the bank with the ability to exercise independent judgement.

Also read: Audit firms told to delve deep into management explanations

The HIA as well as the internal audit function should have the authority to communicate with any staff member and have access to all records or files that are necessary to carry out the entrusted responsibilities.

RBI underscored that requisite professional competence, knowledge and experience of each internal auditor is essential for the effectiveness of banks’ internal audit functions.

The desired areas of knowledge and experience may include banking operations, accounting, information technology, data analytics and forensic investigation, among others.

The HIA will directly report to either the Audit Committee of the Board (ACB) / MD & CEO or Whole Time Director (WTD).

“Should the Board of Directors decide to allow the MD & CEO or a WTD to be the ‘reporting authority’ of the HIA, then the ‘reviewing authority’ shall be with the ACB and the ‘accepting authority’ shall be with the Board in matters of performance appraisal of the HIA,” the RBI said in a circular.

Besides, in such cases, the ACB should meet the HIA at least once in a quarter, without the presence of the senior management, including the MD & CEO/WTD.

As per the circular, the HIA will not have any reporting relationship with the business verticals of the bank and will not be given any business targets.

In foreign banks operating in India as branches, the HIA will report to the internal audit function in the controlling office / head office.

Except for the entities where the internal audit function is a specialised function and managed by career internal auditors, the Board should prescribe a minimum period of service for staff in the Internal Audit function and HIA should be appointed for a reasonably long period, preferably for a minimum of three years.

“The Board may also examine the feasibility of prescribing at least one stint of service in the internal audit function for those staff possessing specialised knowledge useful for the audit function, but who are posted in other departments, so as to have adequate skills for the staff in the Internal Audit function,” RBI said.

Also read: RBI to mandate risk-based internal audit for large UCBs, NBFCs

The central bank observed that the independence and objectivity of the internal audit function could be undermined if the remuneration of internal audit staff is linked to the financial performance of the business lines for which they exercise audit responsibilities.

Thus, the remuneration policies should be structured in a way that it avoids creating conflict of interest and compromising audit’s independence and objectivity.

No outsourcing

While the internal audit function should not be outsourced, RBI said where required, experts, including former employees, could be hired on contractual basis subject to the ACB being assured that such expertise does not exist within the audit function of the bank.

“Any conflict of interest in such matters shall be recognised and effectively addressed. Ownership of audit reports in all cases shall rest with regular functionaries of the internal audit function,” the circular said.

RBI has encouraged banks to adopt the International Internal Audit standards, such as those issued by the Basel Committee on Banking Supervision (BCBS) and the Institute of Internal Auditors (IIA).

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