TMI BlogGUIDANCE NOTE ON MAINTENANCE OF COST ACCOUNTING RECORDS FOR CONSTRUCTION INDUSTRY INCLUDING REAL ESTATE AND PROPERTY DEVELOPMENT ACTIVITYX X X X Extracts X X X X X X X X Extracts X X X X ..... are in the process of listing on any stock exchange, whether in India or outside India. Provided that these rules shall not apply to a company which is a body corporate governed by any special Act; Provided further that these rules shall not apply to the activities or products covered in any of the following rules,- ( 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. A copy of the above notification is attached as annexure I. In view of the above as well as the clarification issued on 25th May, 2012 (annexed as annexure II) by the Ministry of Corporate Affairs, companies engaged in: ( a ) Construction (incl. development or real estate) industry who meets with the threshold limits laid down in Rule 3 of the Companies (Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent's project site. The client normally makes payment based on the progress of work as per the contract. Contracts also normally stipulate work/quality certification by a client nominated third party consultant. Contracts also lay down performance guarantee conditions, warranty/defect liability period, liquidated damages for schedule delay, price variation clause if any, client's obligations during construction period, method to be followed for any change in scope of work, claim management, force-majeure clause, arbitration etc. The duration of a project may vary from project to project for different industries. Normally the projects are of long duration (more than 12 months) and revenue is recognised generally based on Accounting Standard (AS-7) notified by Government of India, Ministry of Corporate Affairs. 2.2 The categories under which the Constructions Industry may be operating are: Construction involving civil and heavy engineering Real estate and Property development Construction projects involving specialty trades Few examples of above categories are as under: Construction involving civil an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n/development of everything that is permanently attached to the land. These permanent fixtures to the land include buildings, fencing to the buildings and other fixtures such as plumbing, heating and lighting appliances. Real estate development is the act of purchasing land, real estate, making improvements to the land and/or existing buildings on it and/or new construction - either by themselves or by contractors and selling the property after development. Developers purchase the land/real estate from Government/existing owner. Some commonly used models of Real estate development are: Green field development (Traditional model) Redevelopment model Examples of Real estate development projects are: Housing, Land and Township Infrastructure Development Development of commercial real estate Development of Corporate IT parks 2.3.3 EPC Contracting Model The Developer of a project (either Govt. or Private player under PPP model) delegates a portion of the contract to an EPC (Engineering, Procurement and Construction, including installation, commissioning etc. wherever applicable) Contractor. These contracts are finalised nor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls in a structured manner on a regular basis so that the accumulation is possible on a periodical basis to arrive at the cost of a particular cost object. Such analysis of individual cost components and relating it to the activity for which the same is incurred would help the company in taking proper management decisions. 3.3 It should be kept in mind that in a manufacturing organisation, the operations include certain repetitive processes resulting in a particular product that can be measured in finite manner. In a construction activity, each project or operation can be different and distinct and there is a need to define the cost object in relation to which the costs are required to be accumulated and reported. 3.4 Reference is also drawn to the product group classification notified by the Ministry of Corporate Affairs where the construction industry has been classified under the following service groups: ( a ) Construction of residential buildings ( b ) Construction of non-residential buildings ( c ) Construction of highways, road, bridges etc. ( d ) Construction of industrial and non industrial plants, structures and facilities ( e ) Laying of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s engineering, procurement, manufacturing/fabrication, construction and/or installation/commissioning. Hence CARR will be applicable from the initial stage of Engineering or Procurement or Construction activity, as applicable. 3.7 These rules will not apply to construction activity which is not meant for sale or for commercial use. For example, a company not engaged in construction business, but constructing staff quarters for its employees or erecting manufacturing plant, will not be covered under the maintenance of CARR relating to Construction activity. 3.8 Nature of cost accounting records for construction activity Companies are to maintain books of accounts as per section 209 of the Companies Act, 1956 , including cost accounting records on going concern basis. Therefore even if a company has not commenced any project or activity, still records are required to be maintained. In case of companies engaged in manufacturing or production of items for self consumption then: ( a ) Valuation of product which are covered under CETA, shall be in accordance with Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 read with CAS-4 (Cost A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uildings and Project C consists of 2 buildings each of such building containing different types of flats. The company is also engaged in Project D which is construction of a 15 KM stretch of road which also includes a Bridge. Project E of the company is construction and erection of a Power Plant. The company has received the contract of road and bridge construction as 2 separate projects (say Projects D1 and D2). For maintenance of cost accounting records, the company would be required to maintain specified records in respect of Projects A, B, C, D1, D2 and E as its distinct and individual cost objects. 3.9.2 Detailed cost records are also to be maintained for each sub cost centre/sub project. These records are also used for internal reporting (MIS) , cost control and decision making process as these are useful for determining the cost of project/activity separately. 3.10 Methodology 3.10.1 Project Costing Methodology Once a project is awarded based on Technical/Commercial/Price evaluation, a distinct project number is allotted for each project. As per the requirement of management, costs can be collected for various activities and the same can be in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting principles and cost accounting standards should not be considered as a part of cost and should be considered as a charge in the costing profit and loss account (reconciliation statement between cost accounts and financial accounts). 3.14 In respect of large companies engaged in various different construction projects, the administrative overheads and corporate expenses are not allocated to individual project accounts. However, for cost accounting records and to arrive at the true project costs, such overheads should be apportioned to individual projects on a suitable basis. 3.15 Interest and Financing charges, not directly related or identified with a particular project should be apportioned to the projects on a suitable basis. CHAPTER 4 Generally Accepted Cost Accounting Principles and Cost Accounting Standards 4.1 Rules 4(3) of the CARR 2011 provides that the cost records shall be maintained in accordance with the generally accepted cost accounting principles and cost accounting standards issued by the Institute; to the extent these are found to be relevant and applicable. The variations, if any, shall be clearly indicated and explained. 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Cost Accounting Standards. 5.2 The Board has so far released 14 Cost Accounting Standards. The structure of Cost Accounting Standard consists of: Introduction, Objectives of issuing standards, Scope of standard, Definitions and explanations of the terms used in the standard, Principles of Measurement, Assignment of Cost, Presentation and Disclosure. 5.3 While formulating the Cost Accounting Standards, the CASB takes into consideration the applicable laws, usage and business environment prevailing in India. CASB also gives due consideration to the Cost Accounting Standards, principles and practices being followed by the other countries in the world. If due to subsequent changes in the law, a particular standard or any part thereof becomes inconsistent with such a law, the provisions of the said law shall prevail. 5.4 Applicability of CAS: 14 Cost Accounting Standards have been issued and their applicability is discussed as under: CAS No Title Applicability CAS 1 Classification of Cost Applicable. To be applie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost accounting policy which shall be adopted for determining the cost of the project. The policy shall cover the following areas: ( a ) Identification of cost centres/cost objects (projects) and cost drivers. ( b ) Accounting for material cost, stores at store yards, employee cost, and other relevant cost components. ( c ) Accounting, allocation and absorption of Overheads ( d ) Accounting for Depreciation/Amortization, Transfer in and transfer out of equipment from the site. ( e ) Accounting for scarps, wastage etc. ( f ) Basis for Inventory Valuation ( g ) Methodology for valuation of Inter-Unit/Inter Company and Related Party transactions. ( h ) Treatment of abnormal and non-recurring costs including classification of other non-cost items. The following are examples of Non-Cost Items which are treated as reconciliation items:- Compensations on account of damage/loss of life etc. Insurance claims received (pertaining to previous years) Idle cost on the project (example: waiting for the ROW, etc. on NHAI contracts) Demurrage charges, Contract Cancellation Expenses, Warranty/Defect Liability c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per the definition prescribed in the rules). For the above purpose, the Cost Accountant may be either a permanent employee of the company or a practicing cost accountant/firm holding valid certificate of practice. In either case, it is recommended that Board of Directors is kept informed about the arrangement. ( iii ) Board of Directors of the company need to approve all the Annexure to the compliance report. ( iv ) Compliance Report is to be filed in Form B as per the notification dated 3rd June, 2011, and no other details of cost records are required to be filed with the Government. A template of the annexure to the Compliance Report is annexed at annexure IV. Necessary guidance for filling the annexure is given in paragraph C. ( v ) Form A of the Compliance Report along with Annexure is required to be e-filed with the Central Government within 180 days from the close of financial year. C. Filling of Annexure to the Compliance Report Item 1: General a. Name of the Company, b. Registered office address c. Financial year to which the Compliance Report relates Fill above details of the company. Item 2: Quantitative information: under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment indicating financial as well as cost valuation of stock in quantity and value relating to products manufactured or produced. For others product group details may be furnished in value as per cost accounts. For Real Estate business, any difference in valuation of inventory between financial books and cost accounting records needs to be disclosed. D. Filing of the Compliance Report in XBRL Mode The Ministry of Corporate Affairs vide General Circular No. 8/2012, dated 10th May, 2012 has mandated the filing of Cost Audit Report and Compliance Report in the extensible Business Reporting Language (XBRL) mode from the financial year 2011-12. The Ministry of Corporate Affairs, vide General Circular No. 18/2012, dated 26th July, 2012 has extended the last date for filing of the Cost Audit Reports and Compliance Reports for the year 2011-12, with the Central Government in the XBRL mode upto 31st December, 2012. For this purpose the Costing Taxonomy and related Business Rules including sample instance document may be downloaded from the website of Ministry of Corporate Affairs. The specific links are as follows: Costing Taxonomy http: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1529 dated 27th November, 1972, (xi) G.S.R. 590(E) dated 29th December, 1975, (xii) G.S.R. 601(E) dated 31st December, 1975, (xiii) G.S.R. 606 dated 20th April, 1976, (xiv) G.S.R. 605 dated 22nd April, 1976, (xv) G.S.R. 126(E) dated 24th March, 1977, (xvi) G.S.R. 157(E) dated 1st April, 1977, (xvii) G.S.R. 417(E) dated 28th June, 1977, (xviii) G.S.R. 45(E) dated 31st January, 1979, (xix) G.S.R. 506(E) dated 10th May, 1984, (xx) G.S.R. 688 dated 25th June, 1984, (xxi) G.S.R. 767 dated 7th July, 1984, (xxii) G.S.R. 664 dated 1st July, 1985, (xxiii) G.S.R. 574 dated 31st July, 1990, (xxiv) G.S.R. 258(E) dated 3rd March, 1993, (xxv) G.S.R. 677(E) dated 29th October, 1993, (xxvi) G.S.R. 678(E) dated 29th October, 1993, (xxvii) G.S.R. 186(E) dated 12th April, 1996, (xxviii) G.S.R. 202(E) dated 6th May, 1996, (xxix) G.S.R. 271(E) dated 9th July, 1996, (xxx) G.S.R. 537(E) dated 11th September, 1997, (xxxi) G.S.R. 536(E) dated 11th September, 1997, (xxxii) G.S.R. 704(E) dated 28th September, 2001, (xxxiii) G.S.R. 276(E) dated 24th April, 2001, (xxxiv) G.S.R. 277(E) dated 24th April, 2001, (xxxv) G.S.R. 685(E) dated 8th October, 2002, and (xxxvi) G.S.R. 562(E) dated 2nd September, 2004, exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting or adapting any product with a view to its use, sale, transport, delivery or disposal; or ( iii ) constructing, reconstructing, reconditioning, servicing, refitting, repairing, finishing or breaking up of any products. ( k ) Mining Activity includes any act, process or method employed in relation to the extraction of ores, minerals, oils, gases or other geological materials from the earth's crust, including sea bed or river bed. ( l ) Processing Activity includes any act, process, procedure, function, operation, technique, treatment or method employed in relation to- ( i ) altering the condition or properties of inputs for their use, consumption, sale, transport, delivery or disposal; or ( ii ) accessioning, arranging, describing, or storing products; or ( iii ) developing, fixing, and washing exposed photographic or cinematographic film or paper to produce either a negative image or a positive image; or ( iv ) printing, publishing, finishing, perforation, trimming, cutting, or packaging; or ( v ) pumping oil, gas, water, sewage or any other product; or ( vi ) transforming or transmitting, distributing power or electricity; or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services during the financial year. It includes any turnover from job work or loan license operations but does not include any non-operational income; ( q ) All other words and expressions used in these rules but not defined, and defined in the Act and rules made under clause (d) of sub-section (1) of section 209 of the Act shall have the same meanings as assigned to them in the Act or rules, as the case may be. 3. Application- (1) 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 aggregate 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. Provided that these rules shall not apply to a compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined under these rules, relating to a period of not less than eight financial years immediately preceding a financial year or where the company had been in existence for a period less than eight years, in respect of all the preceding years shall be kept in good order. (7) It shall be the duty of every person, referred to in sub-section (6) and (7) of section 209 of the Companies Act, 1956 (1 of 1956) , to take all reasonable steps to secure compliance by the company with the provisions of these rules in the same manner as he is liable to maintain accounts required under sub-section (1) of section 209 of the said Act. 5. Form of the Compliance Report - Every company to which these rules apply shall submit a compliance report, in respect of each of its financial year commencing on or after the 1st day of April, 2011, duly certified by a cost accountant, along with the Annexure to the Central Government, in the prescribed form. 6. Time-limit for submission of Compliance Report - Every company shall submit the compliance report referred to in rule 5 to the Central Government within one hundred and eighty days from the close of the company's financial year to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame of the company ( b ) *Address of the registered office or of the principal place of business in India of the company ( c ) *E-mail Address of the company 3 ( a ) *Financial year covered by the compliance report From (DD/MM/YYYY) To (DD/MM/YYYY) ( b ) *Date of Board of directors' meeting in which annexure to the compliance report was approved (DD/MM/YYYY) 4. Details of the cost accountant ( a ) *Category of the cost accountant ○ Individual ○ Cost accountant's firm ( b ) In case of individual, whether the cost accountant is in permanent employment of the company or in practice ○ In Employment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 1 Compliance report as per the Companies (Cost Accounting Records) Rules, 2011. Attach 2 Optional attachments(s) - if any Attach List of attachments Remove attachment Verification: To the best of my knowledge and belief, the information given in this form and its attachments is correct and complete. I have been authorized by the Board of directors' resolution number dated (DD/MM/YYYY) To sign and submit this form. I am authorized to sign and submit this form. To be digitally signed by: Managing Director or director or manager or secretary (in case of an Indian company) or an authorized representative (in case of a foreign company) Digital Signatures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company. 4 In my/our opinion, the said books and records give/do not give the information required by the Companies Act, 1956 in the manner so required. 5 In my/our opinion, the said books and records are/are not in conformity with the generally accepted cost accounting principles and cost accounting standards issued by The Institute of Cost and Works Accountants of India, to the extent these are found to be relevant and applicable. Dated: this ____ day of _________ 20__ at ___________ ( mention name of place of signing this report ) SIGNATURE AND SEAL OF THE COST ACCOUNTANT (S) MEMBERSHIP NUMBER (S) NOTES: ( i ) Delete words not applicable. ( ii ) If as a result of the examination of the books of account, the cost accountant desires to point out any material deficiency or give a qualified report, he shall indicate the same against the relevant para. ( iii ) Briefly give your observations and suggestions, if any, relevant to the maintenance of cost accounting records by the company. ( iv ) Cost accountant may use separate sheet(s) for (ii) and (iii) above, if required. ANNEXURE TO THE COMPLIANCE REPORT [ See rule 2 and ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed in the Finance Act or Central Service Tax Rules, as applicable. SIGNATURE NAME COST ACCOUNTANT (S) MEMBERSHIP NUMBER (S) SEAL DATE Annexure II F. No. 52/1/CAB-2012 Government of India Ministry of Corporate Affairs Cost Audit Branch ***** B-1 Wing, 2nd Floor, Paryavaran Bhavan, CGO Complex, New Delhi-110003 Dated the 25th May, 2012 To, The Secretary General, Construction Federation of India, 1103, Antriksh Bhawan, 22, K.G. Marg, New Delhi - 110 001 Subject: Exemption from applicability of Cost Accounting Records Rules to the Construction Industry. Sir, Please refer your letter dated 23rd March, 2012 on the subject cited. CFI had earlier made a similar reference on 19th December, 2011 and the matter was discussed in MCA on 11th January, 2012 with the representatives of CFI and of few leading construction/development companies wherein it was observed that all such companies are already maintaining cost accounting records for their internal requirements. Cost Accounting Records Rules 2011 do not visualize companies to change their cost accounting system if alrea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... version charges are exempted from the applicability of Companies (Cost Accounting Records) Rules, 2011 . ( c ) Companies (Cost Accounting Records) Rules, 2011 do not apply to such Joint Ventures that are non-corporate entities [i.e. not companies registered under the Companies Act] or to unlisted companies that are below the specified threshold limits or to a body corporate governed by any special Act. ( d ) As on date, no cost audit is applicable on the companies engaged in the construction and/or development (real estate) business. Hence, these companies are only required to maintain cost accounting records and file compliance report with the Central Government that can be signed by their employee cost accountant as defined in Rule 2(c) of the Companies (Cost Accounting Records) Rules, 2011 . Yours faithfully, (B.B. Goyal) Adviser (Cost) Tel: 011-24366005 Copy to: 1. The General Manager, Confederation of Real Estate Developers' Associations of India, 703, Ansal Bhavan, 16, Kasturba Gandhi Marg, New Delhi - 110 001 with reference to their letter no. 59/MCA/2012 dated 3rd April, 2012. You are requested to bring this to the notice of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities may be maintained under a miscellaneous group and disclosed appropriately. ( b ) That the Cost Audit Orders (no.52/26/CAB-2010 dated 2nd May, 2011 and 30th June, 2011) shall not apply to the following cases: I. Generation of electricity for captive consumption. For this purpose, the term Captive Generating Plant shall have the same meaning as assigned in Rule3 of the Electricity Rules, 2005. II. Own manufactured products that are consumed exclusively the company for the sole purpose of production, processing, manufacturing, or mining of its other products or activities that are subject to cost audit. III. Hundred percent Export Oriented Units. ( c ) That only such items falling under the relevant chapter(s) of the Central Excise Tariff Act, 1985 as constitute intermediate or final or allied products of the Industry mentioned in the Cost Audit Order dated 30th June, 2011 shall be covered under cost audit and all other items not related to the industry shall be outside the purview of said orders. For the purpose of these order, the words Intermediate products mean only such products that have already undergone partial manufacturing/ production ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. PS to DII (DR)/DII (policy) 7. PS to Economic Adviser. Annexure IV ANNEXURE TO THE COMPLIANCE REPORT [ See rule 2 and rule 5] 1. GENERAL: ( a ) Name of the company: M/s XYZ Company Limited ( b ) Registered office address: 35, ABC, New Delhi ( c ) Financial year to which the Compliance Report relates: 2011-12 2. QUANTITATIVE INFORMATION: S. no. Name of the Product or Service Group Unit Annual Production (Qty.) Net Sales (Qty.) (Value in Rupees in Lakhs) A Produced or Manufactured Product Groups 1. Cement (Product Group 1102) Tonnes 5000 4500 48 2. 3. etc. B Services Groups ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g/fabrication cost (Rs. Crores) 20 Quantity Q1 Quantity Produced (Unit of Measure) Q2 Quantity Despatched (Unit of Measure) Particulars Total Cost (Rs. crore) Cost/unit ( Rs.) 1. Material Consumed 16.00 2. Direct Employee Cost 0.25 3. Direct Expenses 2.00 4. Works Overheads 1.00 5. Quality Control Cost 0.10 6. Research Development Cost 0.00 7. Administrative Overheads 0.75 8. Total (1 to 7) 20.10 9. Add : Opening stock o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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