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Hey! Who let this riffraff into the room? The techies may protest themselves hoarse but one of the most enduring caste lines in corporate India is about to be breached.

Soon, Mr Sharp Pencil from the accounts department will hop over to tick off computer systems.

T O D A Y

• Fumigating time • Telecom pricing • Oracle CPG for India • SRA for ESOPs • BA-NIIT deal • Compaq project

The Institute of Chartered Accountants of India will issue guidelines to help financial auditors better assess their clients' computer systems for year 2000 compliance.

At the same time, financial experts are demanding that the Central Board of Direct Taxes must quickly come up with rules that will help decide how expenditure on cleaning for Y2K bugs must be accounted.

Now before you ask the obvious, there are two very solid reasons for permitting the finance department to run a technology checklist:

One. At least some large companies will have to spend heavily on making their systems free of the date 2000 bug. And these will have to be disclosed to shareholders. Auditors, in particular, are very interested because accounts are written with the assumption that a company is a going concern. Heavy expenditure on Y2K fixes may alter that assumption significantly.

Two. It would be very difficult to slot expenditure on Y2K compliance and this could lead to litigation between companies and tax authorities. For instance, is expenditure on Y2K solutions 'capital expenditure' like buying computers or real estate? Or is it 'revenue expenditure' like running costs on stationary and salaries. We will shortly see that when it comes to computer software, the distinction is not very sharp.

The date 2000 or Y2K bug arises from the work of shortsighted software programmers who never expected their computer code would continue into the next century. That is why most legacy computer systems read only the last two digits of the year. In 2000 the last two digits would be 00. Then the computers would not know what the century figures of the year are and mess up all date-related work from payrolls to balance sheets.

Worldwide professional institutions, like the International Federation of Accountants, have issued guidelines to auditors for dealing with the Y2K issue.

"The impact of the Y2K problem on the financials of companies will have to be disclosed to all shareholders in the March 1999 statements,'' Kamlesh Vikamsey, Central Council member, Institute of Chartered Accountants of India, has been quoted as saying.

The Central Council meeting to be held on December 13 and 14 would discuss the issue threadbare to issue suitable guidelines.

Those would explain the basic steps involved in tackling the Y2K issue.

First, the corporate client or any other client would have to take an inventory of all hardware and software wherein the Y2K problem could emanate. This would be followed by a study of the Y2K bug's impact on the systems. Solutions and remedies will then have to be found and implemented. The final stage would be the testing of the remedies.

Auditors will be asked to insist on a certificate by outside experts that their client is Y2K compliant.

Auditors would also check their clients to see if their businesses would come to a complete standstill or whether it could still be regarded as a going concern.

"Accounts are prepared on the basis that the corporate entity is a going concern and will continue to function in the years to come. In some cases, management's assessment of the impact of the Y2K issue may cause the going concern assumption of the entity to be called into question, unless the management can take effective action to address its impact,'' a statutory auditor associated with several multinationals points out.

Auditors may have to issue a disclaimer or qualify the audit report depending upon the circumstances of each case.

Most likely, the ICAI will ensure that the directors in their report to shareholders bring out the impact of the Y2K threat on their company.

Also, the financials for fiscal year ending March 31, 1999, would have to reflect liabilities likely to arise out of the Y2K problem and contain sufficient disclosures or even provisions. The ICAI is may also train its members on how to deal with this aspect of auditing.

There are reports that several meetings between ICAI and the Reserve Bank of India have been held. Probably, auditors may have to certify steps taken by banks to tackle the Y2K scenario.

IFA officials point out that in July an international auditing practice statement was released. It's called 'Implications for management and auditors of the year 2000 issue'.

Realising the possibility of an expectation gap vis-à-vis the auditors' role, the statement says that auditors should explain to the management that the Y2K issue does not create any new responsibilities for them and would be addressed only to the extent that it affects the existing audit responsibilities.

The onus on Y2K compliance and reflection of the Y2K impact on financial statements has been placed upon the management.

The IFA statement puts down the issues to be considered by the management. These include

• the mention of Y2K impact with respect to forward looking financial information in financial reporting,
• determining the total costs involved and its treatment in financial statements,
• writing down of assets such as software or computer controlled equipment that may be rendered inoperable and
• disclosure of commitments and contingent liabilities.

However, due to delay in adoption of computers by the Indian industry, the Y2K bug will affect only large corporations.

In fact, if a company is dependent on automation, the area most likely to be hit by the Y2K bug, the auditor will have to be extra careful and ensure that adequate provisions are made.

Litigation may arise owing to delay in delivery or owing to delivery of non-compliant equipment.

General insurance policies will not cover Y2K liabilities. This makes adequate provisions for liabilities more crucial, he adds.

Taxation

Remedial measures in resolving the Y2K problem will lead to heavy expenditure for the corporate sector.

Tax authorities the world over are grappling with the treatment of such expenditure.

Taxpayers will definitely prefer that the entire expenditure is treated as revenue expenditure and deducted in one year itself.

"But, owing to the peculiarities which the Y2K issue throws up, the tax authorities will have to examine the issue on a case by case basis,'' Nishith Desai, an international tax counsellor, has been quoted as saying.

"For example, if a particular software programme has been restored to its original condition and only the problems of the millennium bug have been eliminated, the expenditure should be revenue (expenditure) in nature. But, if the software has been rewritten and its life has been enhanced or some additional utility has been created, the expenditure, or a part of it, should be capitalised,'' he adds.

Echoing the same views, Nihal Kothari, member of the Assocham tax committee, says that expenditure on software should be allowed as a deduction unless it has resulted in the creation of a new asset or can be linked to an existing asset.

For example, if chips are upgraded to give the computer a useful life beyond 2000 the expenditure could be capitalised.

"To avoid litigation later, perhaps, the Central Board of Direct Taxes should issue appropriate guidelines,'' Desai feels.

- Compiled from the Indian media

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