1.12 - Query

Treatment of Cash Incentives not yet Realised in Books of Account.

1. X Limited is a Public Limited Company incorporated in October, 1956.
2. The Company is manufacturing engineering goods (Light Engineering Industry) as optional accessory to Transport Industry.
3. The Company is exporting its products to Middle East and African countries since November, 1963.
4. Whereas the average ex-works selling price in India (net) is around Rs. 21/- for Calcutta, the average selling price for export market if F.O.B. Rs. 7/- (approx.) for Calcutta.
5. The Company has submitted various papers and documents for refund of Customs Duty Drawback and also for the Subsidy but no decision has yet been taken by the Government authorities, hence, benefits have yet to be received.
6. The quantum of the benefit on the above grounds have not been finalized yet and the Company has no idea whatsoever about the amount or benefit to be received by it from the Government authorities.
7. The Company is being given Import Licences @ 75% of the F.O.B. value of the export amounts as export incentive entitlements, goods on which benefits have not been received by the Company yet. Therefore, the benefits, if there would be any, in selling them or using them in the manufacturing process, have not yet been calculated.
8. The company closes its financial year on the 31st December.


1. The loss apparent on the export of the goods, i.e. the difference between Rs. 21/- F.O.B. Calcutta price and Rs. 7/- F.O.B. Calcutta, of Rs. 14/- requires to be adjusted in the Profit & Loss Account.
2. Whether any estimated amount on account of various benefits to be received by the Company on account of the exports made by it, either from the Governmental authorities or by selling imported spares should be taken into account if the Company closes its accounts before the benefits are received and/or ascertained?
3. If the above cannot be taken into account, how the loss should be adjusted, as it is obvious that the goods if sold in the internal market would have earned Rs. 14/- extra per unit?
4. Whether there is any way to deduct the cost of manufacture of goods exported from the total cost of manufacture and the net cost of manufacture of exported goods transferred to Suspense Account to be adjusted as and when benefits are received either in cash or in kinds?
5. Whether the net difference of Rs. 14/- per set can be taken in the Profit & Loss Account under the heads “Benefits receivable for exports made during the year” and a corresponding amount shown in the Balance Sheet as “Income Accrued but not Received”?
6. If any other Public Limited Company, doing similar business, is showing the benefits receivable in subsequent periods in a different way, then the same may kindly be intimated.


May 5, 1965

The time-honored dictum (based on the “generally accepted” principle of conservatism) that anticipated profits should not be taken credit for in the Accounts unless they have accrued, but expected losses should be provided for, would serve as a guiding rule in deciding the extent to which benefits not yet received under Export Incentive Scheme may be taken credit for. However, an equally important guiding consideration should be that the Accounts should show a true and fair view of the trend of the actual results of the company’s working over a number of years. Thus that accounting treatment should be adopted in respect of such benefits which, in the facts and circumstances of the case, comes nearest to reconciling what may well be the conflicting requirements of these two considerations.

It is emphasized that the terms and conditions of the various Export Incentive Schemes for different industries are not uniform and therefore a set accounting treatment may not be equally appropriate in every case. Due care should be exercised by Company Managements in ascertaining the correct and full terms and conditions of the actual Scheme applicable in their own case.

Subject to the foregoing remarks, if the goods are exported by a company knowingly at a loss which is offset by a right to benefits by way of import licences and such benefits have in fact been earned, an appropriate amount in respect of such earned benefits, conservatively estimated, may be taken credit for, even though the actual amount of the benefit is finally settled and received by the company after the end of the relevant accounting period. Such amount, which should not, of course, exceed the amount of the loss originally incurred on the exports, may then be added to the value of the goods imported against such licence and the cost of the imported goods increased accordingly. However, such procedure should be followed only where it is certain that licences of the appropriate value will be issued in accordance with a scheme which is already in operation. Where the principle of issuing licences is not accepted by the Government, it is not considered appropriate to take credit for any expected benefit until such time as the principle is accepted and the licences issued. This might result in the distortion of results in the first year when a large loss may be incurred, followed by a large profit in a later year when the import licence is received and utilized. In such cases, the Directors may be advised to place a note on the accounts explaining the facts of the case. It is emphasized that only such amount of earned benefit as will definitely be recovered by utilization of import licences should be taken credit for. An example of this treatment will be found in the Accounts of the Tata Oil Mills Company Ltd., for the year ended 31st March, 1964.

There appears to be some inconsistency in setting sown the actual facts of the Querist’s cast at points 5, 6 and 7 of the “Introduction”. The Querist states at point 6 that “the Company has no idea whatsoever about the amount or benefit to be received by it”. At the same time it appears, from what is stated at points 5 and 7, that the Export Incentives in this case consist of : (a) Import Entitlement at 75% of the F.O.B. value of exports, for which the licence has been given to the Company ; (b) Customs Duty Drawback, the basis of computation whereof has probably been laid down under a Scheme, since the Company has apparently submitted a claim for refund of excess Customs Duty earlier paid ; and (c) a “Subsidy”, the precise form and extent whereof has been left unexplained.

We now proceed to answer seriatim a specific Queries raised.

1. It is presumed that the Query is whether the loss on Export Sales already effected has to be charged to the Profit and Loss Account. The answer is that the Profit and Loss Account should be credited under the head “Sales with the actual (reduced) value of such Sales.
2. Yes, provided the benefit has been definitely earned before the close of the relevant year. In such case, it may be taken credit for, but if the actual amount has not been ascertained by the time accounts are closed, a conservative estimate should be made.
3. This query does not arise in view of the answer at 2 above.
4. It would not be correct to carry forward on Suspense Account the total cost of manufacture of goods already exported and sold before the close of the year.
5. No, only the estimated amount of the actual benefit already earned may be carried forward in the manner set out.
6. Alternative presentations adopted by Companies engaged in the textile industry have been referred to in an Article entitled “Benefits Under Export Incentive Scheme” which was published at pages 379 and 380 of the January 1965 issue of the Institute’s Journal. We cannot quote off hand an actual published report of a light engineering goods manufacturing industry.