Ministry of Corporate Affairs has recently issued various notifications/circulars relating to Cost Audits. Ministry of Corporate Affairs has notified the Companies (Cost Audit Report) Rules, 2011 (Rules) vide Notification No. GSR 430(E), dated 3-6-2011, which supercede the Cost Audit (Report) Rules, 2001. In this regard, we would like to provide a bird's eye view of the various provisions/amendments.
I) Relevant Sections, Rules and orders for applicability of Cost Audit
- Section 209(1)(d), 227(1), 233B(1) of the Companies Act, 1956 (Click here to see the provisions of the relevant sections)
- Companies Cost Audit (Report) Rules, 2011, (hereinafter referred to as Rules)
- Appointment of Cost Auditor by Companies [Circular No. 15/2011 dated 11.04.2011]
- Cost Audit Order dated 2nd May, 2011 and Cost Audit Order dated 30th June, 2011
- Circulars No.67 & 68 of 2011 dated 30th November, 2011 (click here to refer the circulars)
II) Applicability of the Rules
These rules apply to every Company engaged in the production, processing, manufacturing or mining activities (Click here to see the definitions of production activity, processing activity, manufacturing activity and minig activity) and which satisfy the criteria specified for any of the following categories of industries:
Two categories of Industries are prescribed with separate criteria to be met in order to fall within the purview of the Rules, which are as mentioned below:
Following Industries to which respective cost accounting rules have to be complied with and satisfy any one of the conditions specified in criteria 2:
(a) Cost Accounting Records (Bulk Drugs) Rules, 1974
(b) Cost Accounting Records (Formulations) Rules, 1988
(c) Cost Accounting Records (Fertilizers) Rules, 1993
(d) Cost Accounting Records (Sugar) Rules, 1997
(e) Cost Accounting Records (Industrial Alcohol) Rules, 1997
(f) Cost Accounting Records (Electricity Industry) Rules, 2001
(g) Cost Accounting Records (Petroleum Industry) Rules, 2002
(h) Cost Accounting Records (Telecommunications) Rules, 2002
1) Aggregate value of net worth as on the last date of the immediately preceding financial year exceeds five crores of rupees [or]
2) 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]
3) The Company's equity or debt securities are listed or are in the process of listing on any recognized stock exchange, whether in India or outside India.
Industries which are engaged in producing, manufacturing or processing or mining activities including intermediate products and articles or allied products thereof in the respective chapter nos. mentioned below and which satisfy any of the conditions specified in criteria 2:
|Sl. No.||Name of the Industry||Relevant Chapter Heading of the Central Excise Tariff Act, 1985|
|1||Cement||Chapter 25, 38 and 68|
|2||Tyres & Tubes||Chapter 40|
|3||Steel||Chapter 72 and 73|
|4||Paper||Chapter 47 and 48|
|7||Paints & Varnishes||Chapter 32|
1) 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 hundred crores of rupees.
2) The Company's equity or debt securities are listed [or] are in the process of listing on any recognized stock exchange, whether in India [or] outside India.
Note: Only such items which fall under the relevant chapter heading as mentioned above constituting as intermediate or final or allied products of the above mentioned industry shall be covered under the Rules. (Click here to refer the circulars)
III) Non applicability of the Rules
a) Generation of electricity for captive consumption. Captive Generating plant shall have the same meaning as assigned in Rule 3 of the Electricity Rules, 2005.
b) Own manufactured products for captive consumption for the sole purpose of production, processing, manufacturing or mining of its other products or activities that are subject to cost audit.
c) 100% Export Oriented Units.
IV) Maintenance of Cost Accounts
a) All Companies to which these rules apply has to maintain, cost accounts at its registered office or any other place decided by the Board of Directors.
b) All Companies coming under the perview of these Rules and the Companies (Cost Accounting Records) Rules, 2011 for the first time shall maintain in good order, the cost records, cost details, statements, schedules etc., for the next eight financial years beginning with first year of application of the said Rules.
V) Form of the Cost Audit Report
Every cost audit report submitted on or after 1-4-2012, irrespective of the financial year of the Company to which it relates, shall be in the form prescribed under the 2011 Rules (i.e.,Form-II)
VI) Comparison of Rules, 2001 and Rules, 2011
|Particulars||Provisions as per Companies Cost Audit (Report) Rules, 2001||Provisions as per Companies Cost Audit (Report) Rules, 2011|
|Applicability||These rules applied to a particular Company only if it was issued a specific order by the Central Government.||These rules apply to the companies satisfying the criteria as mentioned in Pt. No. II above|
|Performance Appraisal report||Not required to be furnished by the Cost Auditor||Needs to be furnished by the Cost auditor to the Company but not required to be filed. (Click here to see the format of the Performance appraisal report)|
|Opinion on compliance with the Cost accounting standards and Generally Accepted Cost Accounting Principles||Cost auditor is not required to furnish his opinion.||Cost Auditor is required to give his opinion on the same.(Click here to see the format of the Form II)|
|Procedure for appointment of Cost Auditors||No specific procedure is given||Cost auditor has to be appointed as per the General Circular Nos. 15/2011 dated April 11, 2011 and 68/2011 dated 30th November, 2011 respectively (Click here to see the provisions relating to appointment of Cost Auditor)|
|Observations and suggestions of the Cost Auditor on various matters||Required as per the Form II of the Rules||Not required to be given as per revised format of the Form II.|
|Appoinment of more than one cost auditor and signing of the Cost Audit Report||No specific rule was there||i) Cost Audit requirement is for only one product of a Company: - Consolidated Report has to be issued duly signed by all the cost auditors if more than one is appointed.|
ii) Cost Audit requirement is for more than one product of a Company:
- If Company has appointed only one auditor for all the products, then he may issue a consolidated report or a seperate report for each of the products.
- If Company has appointed separate cost auditors for each product, then the auditors havc got an option either to issue a consolidated report duly signed by all the auditors [or] a seperate report for each of the products.
VII) Applicability of filing of Compliance Report under Companies (Cost Accounting Records) Rules 2011 in correlation with Companies (Cost Audit Report ) Rules,2011
i) If all the products/activities of the Company excluding exempted categories are covered under the cost audit rules, there is no requirement to separately file the compliance report
ii) If one or more product(s)/activity(s) of the Company is covered under the cost audit rules and there are other products covered only under cost accounting rules, the Company has to file Compliance Report for the Company as a whole covering all the products of the Company.
iii) If one or more product(s)/activity(s) of the Company is covered under the cost audit rules and there are other products not covered under cost accounting rules, there is no requirement to file Compliance Report.
VIII) Time - limit for submission of cost audit report
The Cost Auditor has to submit the following reports within 180 days of the close of the year to which the audit relates:
- Cost Audit Report in the prescribed Form II to the Central Government and to the Company.
- A performance appraisal report to the Company in prescribed Form III.
IX) Disclosures in the Annual Report of the Company
The Company shall disclose full particulars of the cost auditor, along with the due date and the actual date of filing of the cost audit report by the cost auditor, in its annual report for each relevant financial year.
X) Pros and Cons of the Companies (Cost Audit Report) Rules, 2011
- These rules give a legal backing for the appointment of Cost Auditors.
- The Performance Appraisal Report enables the comparison of costs incurred by the Company over the years and take appropriate decisions leading to reduction of costs.
- The rules have reduced the bulkiness of the Cost Audit report
- It might result in the release of sensitive information, which might result in the Companies losing their competitive advantage.
- It increases the costs of the Company as the Company has to appoint a Cost Auditor for the purpose of getting the cost records audited as per these rules.
- The Company has to invest some time in providing the information of the cost records to the Cost Auditor for the purpose of conducting Cost Audit.
The Rules have given a legal backing for the appointment of the Cost Auditor thereby providing better opportunities for the Cost And Works Accountants. Apart from strengthening the compliance by the companies in determining their costs involved, these rules have also reduced the bulkiness of the Cost Audit report.
Disclaimer: The entire contents of this document have been developed on the basis of relevant regulations and are purely the views of the author. Though the author has made utmost efforts to provide authentic information however, the author and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.