The Foreign Exchange Manual 2002 (Chapter 14, paragraph 12 (iv)) requires acknowledgement of RFT agreements by the authorised dealers. For the acknowledgment of RFT agreement, the company/entity (the applicant) has to submit its RFT agreement, Application (specified in Appendix V-52 of the Foreign Exchange Manual) and other documents with the authorized dealer.

In this regard, paragraph 12 (iii) (b) and (e) of Chapter 14 of the Foreign Exchange Manual requires the external auditor of the applicant to:

• Verify the information submitted by the applicant in the Application (Appendix V-52);

• Verify the basis and actual calculation of the RFT amount payable;

• Comment on the value addition through the RFT agreement; and

• Certify that the principles of arm’s length pricing have been observed, and basis of pricing are transparent and verifiable (this certification is required when the counterparty in the RFT agreement is a related party).

The Institute, in view of the above-noted significant change in the Foreign Exchange Manual relating to the external auditor’s role and responsibilities, has developed following documents for the consistent understanding and use by the auditors and other stakeholders:

• Format of assurance report on company’s application for acknowledgement of RFT agreement;

• Formats of the applicant’s statements (Statement of basis and calculation of RFT, Statement of value addition through RFT. and Statement of arm’s length pricing of RFT); and

• A brief explanation of applicant’s and auditor’s responsibilities under paragraph 12 (iii) b and (e) of Chapter 14 of the Foreign Exchange Manual.

Format of assurance report

The Auditing Standards and Ethics Committee of the Institute has developed the format of the ‘Independent Reasonable Assurance Report on the Application for Acknowledgement of Agreement forRoyalty / Franchise Technical Services Fees’, in accordance with the revised International Standard on Assurance Engagements 3000, ‘Assurance Engagements other than Audits or Reviews of HistoricalFinancial Statements’ (ISAE 3000) (Revised). The assurance report covers the engagement scope and auditor’s opinion on the matters specified in paragraph 12 (iii) (b) and (e) of Chapter 14 of the Foreign Exchange Manual.

The format of the Assurance Report is enclosed as ‘Appendix A’to this Circular.

Formats of the applicant’s statements

The applicant, in addition to the Application (i.e. Appendix V-52), should also provide information to the auditor related to the calculation of the RFT fee payable, value addition through the RFT agreement, and arm’s length pricing for the RFT payable to the related party.

In this regard, formats of following statements have been developed to facilitate the applicants and other stakeholders.

• Statement of Basis and Calculation of Royalty/Franchise/Technical Fee Payable;

• Statement of Value Addition through Royalty/Franchise/Technical Agreement; and

• Statement of Arm’s Length Pricing for Royalty/Franchise/Technical Payable to the Related Party (this statement would be required only when RFT is payable to a related party).

The Statements are enclosed as ‘Appendices B1-B3’ to this Circular.

Explanation of applicant’s and auditor’s responsibilities

A brief paper has also been developed to assist in developing common understanding among applicants and auditors about the requirements and respective responsibilities under paragraph 12 (iii) (b) and (e) of Chapter 14 of the Foreign Exchange Manual. The paper is enclosed as ‘Appendix C’ to this Circular.

Members are advised to take note of the above.