Restructuring of Partnership into Private Company

kamranACA · 10-02-2009, 08:24 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by hshamsi
 @ above

i think wz nt able to effectively communicate my point to Star, m sorry bt i tried to.. n m glad Kamranaca helped clearing my point too, thnx for this, n one more thing m nt 'his' s

regards

Hina Shamsi

<hr height="1" noshade id="quote"></blockquote id="quote">

Hina Shamsi

I am sorry for calling you "his". Actually there is a firm with the name and style "Hyder Shamsi and Company". I took your name as its abbreviation.

Regards,

KAMRAN.

Star · 10-02-2009, 08:40 PM

Dears,

I wish to re-quote the Rule;

QUOTE

A company may issue shares for consideration otherwise than in cash subject to the following conditions, namely;--

(i) The value of assets shall be determined by a consulting engineer registered with Pakistan Engineering Council and borne on the panel of at least two financial institutions as a Valuer;

(ii) the value of assets taken over shall be reduced by depreciation charged on consistent basis;

(iii) the goodwill and other intangible assets shall be excluded from the consideration; and

(iv) certificate from a practicing Chartered Accountant shall be obtained to the effect that the above mentioned conditions have been complied with.

UNQUOTE

From (iv) it is clear that CA is required to certify whether valuation is done by approved consulting engineer (CA is nothing to do how he has determined because SECP has given the authority to the valuer to determine the value of assets) along with (ii) and (iii).

However, during audit we have to follow the auditing standard and have to dig out all the situation.

For depreciation I am still of the same point of view stated earlier,

I wish that members should clear the situation. I am giving one example;

At the date of valuation following information are available for asset;

Cost of acquisition 100 M
Acc. Depreciation to date (2 years) 40 M
Useful Life 5 years

Revalued amount 70 M

I think shares will be issued against 70 M if shares are issued at valuation date and if shares are issued after 6 months of the valuation then depreciation of six months (say 5M) shall be deducted from 70 M and shares will be issued against 65M. (am I right?)

Now come to the interpretion of certification and audit. There are two words used in law that are âto be auditedâ and âto be certifiedâ (audit and certify).

I understand that both words have not same scope and meaning otherwise one word (audit or certify) should have been used in law.

I think certification has limited scope than audit.

As for as misstatement by the valuer is concerned, the reason behind the requirement that the valuer must be approved / registered with PEC is to mitigate such risk of misstatement / inaccuracy and to establish quality standards by PEC.

Anyway, good to have discussion on the topic.

Regards,

*

hshamsi · 10-02-2009, 09:06 PM

@ above

as per my understanding, issuance of capital rules are rules for interpretation of the law, n for a Chartered Accountant, the IFRS's n ISA's prevails above all, so before giving any certification in accordance with the issuance of capital rules or else auditor is required to assess fully all the assumptions used by the valuer besides considering its 'registered' status and else. ( which is also in practise in big 4 )

regards.

> it wznt the Ordinance infact..

Star · 10-02-2009, 09:10 PM

Dear,

Is there any requirement in CA ordinance, 1961 to make such assessment before any certification or like other than audit.

If it is then plz give reference it would be beneficial for all.

Regards,

*

hshamsi · 10-02-2009, 09:45 PM

@ above

sir m extremely sorry , m stating these examples as i've my personal experience being a part of one of big 4. i gave what was upto my knowledge and experience, n i hope i cleared ur point from my side more than enough. other member's , of course more competent thn me can, can explain better thn i tried..

regards.

hshamsi · 10-02-2009, 09:47 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by kamranACA
 <blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by hshamsi
 @ above

i think wz nt able to effectively communicate my point to Star, m sorry bt i tried to.. n m glad Kamranaca helped clearing my point too, thnx for this, n one more thing m nt 'his' s

regards

Hina Shamsi

<hr height="1" noshade id="quote"></blockquote id="quote">

Hina Shamsi

I am sorry for calling you "his". Actually there is a firm with the name and style "Hyder Shamsi and Company". I took your name as its abbreviation.

Regards,

KAMRAN.
<hr height="1" noshade id="quote"></blockquote id="quote">

it no prob sir.

regards

kamranACA · 10-02-2009, 11:57 PM

Star

Are you debating to prove your words or you really want to know the subject matter. If later is the case, have you read my second last post in real sense.

I also mentioned that law uses the words certification and auditing. However, law no where prescribed or guides how audit has to be conducted and how things have to be verified for certification purpose. Auditor always have to obtain guidance from auditing standards for whatever work he performs.

You said certification is lesser in scope. Let me tell you that certification provides far more and absolute assurance while audit only provides moderate assurance. That's why firms are now transforming this certification into "auditors' report to members" wherever possible and wherever law has not given a format.

There cannot be a huge difference between the timing of valuation and issuance of shares since this valuation is made for this very purpose only. Your view about depreciation is incorrect. If there would be a greater difference of time leading to charge depreciation, as you pointed out, it will again require you to get the assets revalued afresh. I mean we cannot destroy the real sense and purpose of law. Depreciation issue is stated in law for the purpose I explained you in second last post. I would like you to see some real life revaluation report issued for this purpose.

CA code of ethics, ordinance, byelaws, everything asks the members to be ethical, professionaly diligent, updated, and don't commit professional misconducts. If the work is not performed properly or is done ignorantly or indifferently and this can be proved some where, members are punished for being guilty of professional misconduct. What do you need to know in this regard? Let me know.

If some CA finds and believes that the valuation of assets (say, Land) is made on too high values that are incorrect by all means, let me know how can he issue a certificate and if he issues what sort of assurance he will provide? It will certainly lead to professional misconduct. We have historical examples of such conclusions.

Either you have to know the profession in detail to understand this matter or we have to stop further debate.

No hard feelings. But if you still have different view, it is nothing but a permamnent difference.

Regards,

KAMRAN.

wsafca · 10-03-2009, 12:16 AM

Thanks Kamran bhai and all!

Discussion has provided me the solution, that is why i love this forum.

Regards

Waqas

Star · 10-03-2009, 01:18 AM

Dear,

It may be a permanent difference of opinion as you pointed. But no where in law has stated that certification provides absolute assurance. however in case of audit, all know, gives moderate / reasonable assurance.

If an asset is revalued, then all its acc. depreciation is reversed at the time of revaluation(all accounting guys would very well know) in the books of accounts.

I cant understand why the Rule is requiring to ensure that the value of assets taken over shall be reduced by depreciation charged on consistent basis.

It is so simple like 1+1=2 When market value of asset is available at the date of issuance of shares then what is the question / reason of reducing the value of asset by charging depreciation on consistent basis.

If you people think, i am debating, i then prefer to close this topic at my end because no intention (of unreasonable debate) is here but only to gain / share and improve knowledge.

Would that it not be a permanent difference in our opinions.

Regards,

*

kamranACA · 10-03-2009, 04:27 AM

Star

I appreciate your approach for discussing the pros and cons. I also liked the way you replied a question on Finance Lease at some other thread.

However, some of the things are quite surprising for me. For example your remarks that where does law say that certificate provides absolute assurance. What is this I mean? Can you tell me where does law say that audit provides moderate assurance?

Here the difference is between "true and fair" and "true and correct". The certificate states "This is to certify that.........". Or "we certify that.......". This certifies a thing in absolute terms and takes the responsibility of "true and correct". This difference is also understandable if one knows the ISAs.

I hope you must have read and be knowing ISAs. So it should be understandable for you.

Your comments about why to charge depreciation on "assets revalued" on consistent basis also depicts that you did not so far have experienced it. I ask you to study IAS 16 to know how assets are revalued. I guarantee you the procedure mentioned in IAS 16 is in fact followed by valuers.

They value assets either on the basis of market based fair values (like Land or investment property) or on the basis or replacement value (like buildings, plant, machinery and vehicles etc). Replacement values are always available for newly constructed or acquired items and have to be depreciated on consistent basis to reduce the "replacement values" to "depreciated replacement values". This is done to match the valuation with current deteriorated condition of the asset.

I wish you to know that normally with the exception of land (valued at market values) all other assets are valued at "DEPRECIATED REPLACEMENT VALUES". All depreciation charged in accounts, however treated, has no bearing or relationship with the depreciation discussed in RULE 8. Rule 8 specifies it as a procedure that how gross valuation will be reduced by the valuer. This depreciation is to be adjusted by valuer in his report to reduce his valuation on consistent basis.

This logically cannot be a depreciation which you understand since the revaluation for issuance of shares has to be made very nearer to the date of issue and such gap of time cannot be so huge which give rise to a need to charge depreciation. If this happens a new valuation will be required.

Further, it is also mentionable that the purpose of such valuation is to assess that the shares are not being issued more than the value of assets. Its purpose is not to state the assets under revaluation model in financial statement at all. Doing so is the choice of accounting method.

In case the value of assets (as per valuation) is lesser than the book values, impairment charge has to be recognised and shares will be issued against reduced net worth. This is as per prudence concept and has to be followed since the business is being transferred.

However, if the valuation of assets is greater than the book values, it is not compulsory to enhance the net worth by increasing the value of assets and issue shares more than the net worth based on book values. It is also not necessary to incorporate such valuation in books of account.
Let me again explain that purpose of Rule 8 is only to check that shares are not being issued on more than the actual underlying value of assets (less liabilities, if any). There is no other condition except to have a validly conducted valuation and a certification that it has been done. These both are interconnected and inter related at least for this very purpose of Rule 8.

I also mention that for stating assets under revaluation model in financial statements (which is entirely another thing and has no linkage with valuation required under rule 8) no rule or law or standard requires specific certification by a practicing CA or auditor. Why? Because such valuations are eventually judged by auditors under a specific ISA during audit. If auditor feels there is some issue, he can modify his report on such valuations as well.

Likewise if a practicing CA feels issues with a valuation done under rule 8 or it is incorrect or misleading in his view, he can either withhold his report and resign from the assignment or can qualify his certification, as may be deemed fit.

Issuance of a wrong certification, believing and knowing it to be wrong, (ie knowing that the valuation is incorrect) will be a professional misconduct.

I again invested this time because I felt you have some issues in its understanding. If the permanent difference still exists, I withdraw from posting further on this thread unless some logical question is asked.

Regards,

Kamran.