Zenith Infrastructure Ltd. is engaged in the construction of large commercial complexes. During the financial year ending 31 March 20X6, the company…

Accounting Treatment As per Ind AS 37 – Provisions, Contingent Liabilities and Contingent Assets, a provision shall be recognised when: An entity has a present obligation (legal or constructive) as a result of a past event;It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; andA reliable estimate of the amount of the obligation can be made. Further, the standard states that if a contract becomes onerous, the present obligation under the contract shall be recognised and measured as a provision. A contract is considered onerous when the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received from it. In the given case, the construction project undertaken by Zenith Infrastructure Ltd. is expected to incur substantial additional costs, resulting in an expected loss on the contract. Since reliable estimates of the additional costs are available, the contract has effectively become an onerous contract. Accordingly, the company should recognise a provision for the expected loss in the financial statements in accordance with Ind AS 37. Failure to recognise the provision would result in overstatement of profits and understatement of liabilities, thereby leading to a misleading presentation of the financial performance and financial position of the company. Ethical Issues The direction given by the Chief Executive Officer to defer recognition of the provision to the next year creates an ethical dilemma for CA. Neha Kapoor. The management's intention to avoid recognising the provision in order to present stronger financial results for obtaining contracts and maintaining credit ratings raises concerns regarding the fair presentation of financial statements. Threats to Fundamental Principles The situation gives rise to the following threats to the fundamental principles of professional ethics: 1. Intimidation Threat The CEO's indication that the financial statements should portray a strong performance may exert pressure on the finance manager to ignore the correct accounting treatment. This creates an intimidation threat to the principles of integrity and objectivity. 2. Advocacy Threat The expectation that the financial statements should support negotiations with lenders and potential clients may compel the finance manager to present information that favours management's interests rather than reflecting the true financial position. This results in an advocacy threat. Professional Competence and Due Care The fundamental principle of professional competence and due care requires that a Chartered Accountant should prepare financial statements in compliance with applicable accounting standards. Since the project contract has become onerous, a provision for the expected loss must be recognised in accordance with Ind AS 37. Not recognising such provision would lead to misstatement of financial statements. The Institute of Chartered Accountants of India Code of Ethics requires members to maintain integrity, objectivity, and professional competence while performing their duties. Appropriate Course of Action CA. Neha Kapoor should: Explain to the CEO the requirements of Ind AS 37 and the implications of not recognising the provision.Emphasise that non-recognition would result in misleading financial statements and may affect the credibility of the company.If the CEO continues to insist on the incorrect treatment, the matter should be escalated to higher levels of governance, such as the Audit Committee or the Board of Directors. If CA. Neha Kapoor succumbs to the pressure and accepts the incorrect treatment, it would amount to non-compliance with accounting standards and a breach of the principle of professional competence and due care. In such a situation, she may be held liable for professional misconduct under Clause (1) of Part II of the Second Schedule of the Chartered Accountants Act, 1949, which states that a member shall be deemed to be guilty of professional misconduct if he or she contravenes the provisions of the Act, Regulations, or Guidelines issued by the Council. Therefore, CA. Neha Kapoor must ensure that the financial statements are prepared in accordance with the applicable accounting standards and ethical principles, even if this requires escalating the matter to the appropriate governance authority.