Applicability of Cost Records in Real Estate/Construction Industry ... - PDF document

Applicability of Cost Records in Real Estate/Construction Industry Statutory Auditors of Construction/Real Estate Companies to exercise caution By Navneet Kumar Jain, Practising Cost Accountant, Delhi Till the year 2010 - 11, cost records were required to be maintained for companies in the manufacturing, mining, processing industry dealing with manufactured goods normally or with specific service Industry. But from the year 2011 - 12, there has been a noteworthy change for the compliance of Section 209(1)(d) of the Companies Act. While costing of various cost objects(May be flats/plots/commercial spaces etc.) in the real estate sector, the regulator's requirement should be kept is mind. A proposal for establishing real estate regulator/authority is already the re with the concerned ministry. Also there is proposed requirement of (Cost of Internal Development Works, Cost of External Development works etc.) So, taking a pragmatic approach and keeping into mind the proposed regulator's requirements, the costing sys tem in the Real Estate should be established. C osting professionals are supposed to work out the margins for different type of units/projects etc and reconcile with the company's financials. So the desigining of the costing system in real estate for statut ory reporting purpose may be slightly different from the costing system already in vogue in the Real Estate companies. Section 209(1)(d) states that [(1) Every company shall keep at its registered office proper books of account with respect to — (d) in the case of a company pertaining to any class of companies engaged in production, processing , manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed if such class of companies is required by the Central Government to include such parti culars in the books of account: With issue of notification with regard to The Companies (Cost Accounting Records) Rules, 2011(CARR - 2011) Dated 3 rd June 2011, the Ministry of Corporate Af fairs brought Real Estate / Construction Industry under statutory Cost Record Maintenance Regime. The rules have defined processing activity and included construction activities in its ambit. Rule 2(l)(IX) of CARR 2011 specifies “Processing Activity” includes any act, process, procedure, function, operation, technique, treatment or method employed in relation to “(ix) constructing, reconstructing, reconditioning, repairing, servicing, refitting, finishing or demolishing of buildings or structures; or” And Applicability clause state that These rules shall apply to every company, including a foreign company as defined under section 591 of the Act, which is engaged in the production, processing , manufacturing, or mining activities and wherein, the aggregat e value of net worth as on the last date of the immediately preceding financial year exceeds five crores of rupees; or wherein the aggregate value of the turnover made by the company from sale or supply of all products or activities during the immediately preceding financial year exceeds twenty crores of rupees; or wherein the company’s equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India So, if the company's turnover exceeds Rs 20 Cr ore or, Net Worth exceeds Rs. 5 Crores or, Company is listed The company has to compulsorily maintain cost records in respect of activities/units sold by the company. The new Cost Accounting regime in the construction/real estate Industry require the attention of the A. Statutory Auditors of Construction/Real Estate Companies B. Construction/Real Estate Companies A. The CARO require the statutory auditor to comment on “(viii) where maintenance of cost records has been prescribed by the Central Government under clause (d) of sub - section (1) of section 209 of the Act, whether such accounts and records have been made and maintained; All the statutory auditors of the real estate/construction companies must take note of it and while reporting in CARO for the year 201 1 - 12 must change the comment they were writing upto 2010 - 11. Now they are supposed to mention cost records has been prescribed by the Central Government under clause (d) of sub - section (1) of section 209 of the Act, Also, the statutory auditors are require d to mention whether such records have been made and maintained. The statutory auditor should review all the cost records and ensure that the same have been made and maintained. However, new Cost Accounting Records Rules 2011 have made the filing of the Co st Compliance Report with the Ministry compulsory. So the Statutory Auditor can review the Draft Compliance Report and few cost sheets and then give his comments in CARO. B. Steps to be taken by Real Estate/Construction Companies for compliance of Companies C ost Accounting Record rules 2011 for the year 2011 - 12 a. Prepare Cost Records for all the locations/Projects for the year 2011 - 12 b. Consolidate the cost records for the company as a whole c. Prepare reconciliations of cost records with financial records d. Prepare th e annexure to the Compliance report e. Obtain Compliance Report as prescribed in Form B. The Report has to be duly signed by the Cost Accountant f. Obtain the approval of the Board of Directors in respect of Annexure to the compliance report g. Fill the details in Form A h. File Form A alongwith attachments like Compliance Report and Annexure with the Ministry of Corporate Affairs before 27 th Sep 2012 The Ministry of Corporate Affairs has issued a circular stating that these rules will not be applicable if the company is performing only jobwork related activities and is not using its own material. Extract of MCA circular through FAQ released by ICAI(Cost) is given below for readers.. Extract of MCA circular As per the provisions of MCA General Circular No. 67/2011 dated 30th November 2011, all companies engaged in the construction business either as contractors or as sub - contractors, who meet with the threshold limits laid down in Rule 3 of the Companies (Cost Accounting Records) Rules, 2011 and undertake jobs with the u se of own materials [whether selfmanufactured/produced or procured from outside] shall be required to maintain cost records and file a compliance report with the Central Government in accordance with the provisions of the Companies (Cost Accounting Records ) Rules, 2011. This includes companies engaged in the construction and/or development of residential, commercial or industrial estates i.e. development of township, residential units, commercial complex, office blocks, industrial parks [including SEZ] etc. or construction of highways, rails, roads,bridges, industrial & nonindustrial structures, or other infrastructure facilities etc. The provisions of Companies (Cost Accounting Records) Rules, 2011 would also apply for construction activities undertaken und er BOT/BOOT mode, or the projects undertaken as EPC contractor or the projects undertaken abroad by a company incorporated in India. However, if a company is engaged in the contracting or sub - contracting activities and is paid only the job work or conversi on charges, then the company will not be covered under Companies (Cost Accounting Records) Rules, 2011. Such contractors or subcontractors who are doing construction jobs without using own materials and are thus paid either the job work charges or the conv ersion charges only will not be covered under the Companies (Cost Accounting Records) Rules, 2011. These Rules also do not apply to such Joint Ventures that are non - corporate entities [i.e. not companies registered under the Companies Act] or to unlisted c ompanies having net worth less than Rs.5 crore & turnover less than Rs.20 crore or to a body corporate governed by any special Act. In case of any further clarifications, please feel free to contact us at navneetic@ yahoo.com . Navneet Kumar Jain FCMA, MBA, LL.B., M.COM., PGDTL, LIII., AIIISLA 9810175020 Delhi.