1.71 - Query



Accounting of Materials-in葉ransit/under Inspection

In our company, materials (imported as well as indigenous) are accounted for only when they are received, inspected and accepted by the company. However, at the end of each accounting period (31st March) materials-in葉ransit/under inspection are valued and are included in closing stock in the balance sheet. Materials rejected are not accounted for and are allowed to remain in 羨dvances Account in case any advance has been paid.

The CIF value of the imported materials-in葉ransit pending their acceptance is not included in the CIF value of imported materials for disclosure in the balance sheet as per the requirements of Schedule VI to the Companies Act, 1956.

The Government auditors have commented upon the existing procedure and have suggested the following modifications:

(i) The CIF value of imported materials whether in transit or in hand awaiting acceptance after inspection as at the balance sheet date should be included in the CIF value of imported materials for disclosure in the balance sheet.

(ii) Materials rejected after inspection at the end of the year even if accepted subsequently and lying with the company at the balance sheet date, should be shown as materials-in葉ransit in the balance sheet.

We hold the view that our practice is not incorrect on the following points:

(i) The company has been consistently following the practice as below:

Imported materials-in葉ransit when finally accepted are treated as purchases and correspondingly a disclosure is made in the notes annexed to the balance sheet where the CIF value of goods imported is required to be shown as per the requirements of Schedule VI to the Companies Act, 1956. Hence any other accounting treatment would be incorrect.

(ii) According to the sound accounting principles, assets and liabilities should not be adjusted for those events after balance sheet date that do not affect the condition of assets or liabilities at the balance sheet date and therefore, materials lying rejected at the end of the year but accepted subsequently need not be shown as materials-in葉ransit in the balance sheet.

Expert advisory committee痴 opinion is solicited.




Opinion

May 13, 1981

The querist has not stated clearly the terms of contract of purchase of the relevant materials and in particular, when, under those terms the property in the goods passes from the seller to the purchaser. Generally, in the case of imported materials, a letter of credit has to be opened before the Bill of Lading is delivered to the purchaser or his agent, and the property in the goods passes at the time of such delivery so that while the materials are in transit, they are in law the property of the purchaser. If these are the terms of the contract of purchase in the querist痴 case, in the opinion of the Committee, the CIF value of imported materials should be included in the amount shown for the aforementioned disclosure.

If, as it does not appear likely, under the terms of the contract, the property in the goods passes to the querist痴 company only on intimation to the seller of their acceptance, after inspection, by the purchaser then in those circumstances the materials which are in-transit, or even held pending inspection and acceptance, will not be the property of the quetist痴 company at all as at the balance sheet date and should not be included for the aforementioned purpose.

From the second suggestion of the Government Auditors, it is not clear whether the querist intends to convey that if, at the time of preparation of the balance sheet, it is known that materials which had earlier been rejected and were held at the balance sheet date as rejected materials have been subsequently accepted on a reversal of the earlier result of the inspection, such materials should be included as materials-in葉ransit belonging to the company in its balance sheet as at the relevant date. Alternatively the company may perhaps intend to say that the Government auditors suggested that materials lying with the company at the balance sheet date after rejection on inspection, should be included in the balance sheet as materials-in葉ransit, regardless of whether or not they are finally accepted or rejected, as a result of a review after balance sheet date.

The Committee is of the opinion that, if under the terms of the contract the property in the goods has passed to the company as at the balance sheet date, the value thereof must be included in the balance sheet. In such event, the rejection of the goods by the company after their inspection may have the effect of their giving rise to a claim for compensation from the supplier or the supplier may be bound to accept back the return of those goods by the company. However, this would be a matter for interpretation of the terms of the contract on the facts and circumstances of each individual case. The significant point would be, whether or not, under the terms of the contract and according to the information available at the time of preparation of the balance sheet the property in the goods at the balance sheet date belongs to the company. If it did, the value of the goods should be included under the head 閃aterials-in-transit in the balance sheet.

As to the amount at which they should be so included in the event of the materials being found to have suffered depreciation in the market value as a result of their not being acceptable on inspection for the purpose for which they were purchased, or owing to any other cause, that should be a separate issue, the answer to which will have to be decided on the facts of each individual case.