Page 3 of 3 FirstFirst 123
Results 21 to 25 of 25

Thread: 02 Accounting Standard 2 - Valuation of Inventories - AS 2

  1. #21
    Accounting Standards
    Guest

    Default Valuation of stock of coal used as fuel for power generation of Accounting Standard 2 - Valuation of Inventories - AS 2

    Valuation of stock of coal used as fuel for power generation of Accounting Standard 2 - Valuation of Inventories - AS 2


    A. Facts of the Case

    1. A public sector company was registered as a company in the year 1975 under the Companies Act, 1956. The company is a Government of India undertaking. One of the objectives of the company is to set up thermal power plants at various geographical locations in the country and to supply bulk power to various State Electricity Boards. The company, being an electricity generating company, is governed by the provisions of the Electricity (Supply) Act, 1948. According to the querist, since the Government has not prescribed any specific formats for the statement of accounts for the central undertakings engaged in generation of electricity, the company is preparing its accounts in the format prescribed in Schedule VI to the Companies Act, 1956. These accounting formats have been adopted by the company since its inception and have been accepted by various audit agencies.

    2. The terms and conditions and tariff for sale of energy by the company, consequent upon promulgation of the Electricity Regulatory Commissions Act, 1998, are regulated by the Central Electricity Regulatory Commission. The tariff for sale of energy comprises two parts, i.e., fixed charges and variable charges. Fixed charges are in the nature of capacity charges payable per annum towards operation and maintenance costs, depreciation, interest on loan/working capital and return on equity for operation at specified levels. Variable charges are fuel charges applicable for energy sold which are arrived at on the basis of various operating parameters and fuel cost, with a provision for adjustment on account of variations in calorific value and price of fuel.

    3. The company operates coal based power plants at various locations either near the coal mines (called Pit Head Stations) or away from the source of coal (called Non-Pit Head Stations). The Pit Head Stations have their own circular railway track (called merry-go-round or MGR system) for transportation of coal from the loading point of the mine to the power plant. Coal in case of Pit Head Stations is transported from delivery point to the station premises using the company’s own rolling stock. In the case of Non-Pit Head Stations coal is transported through Railways. The coal received at the power plant through MGR system or railways, is unloaded in the track hopper. Further handling of coal within the plant is done by conveyor belts. The coal is conveyed to a crusher house for crushing up to a size of 25 mm and the crushed coal is conveyed to the coal mills for pulverisation and firing in the boilers. Crushed coal exceeding the immediate operational requirement is stored in the stockyard.

    4. The company has valued the coal at purchase price including taxes and duties, cess, royalties, surface transportation charges at the mine end, railway freight and unloading cost, if any, upto the power plant end. The weighted average cost method for pricing of coal is followed for valuation of issues for consumption and closing stock.

    5. During the audit of accounts of the company for the year 1999-2000, the statutory auditors expressed the view that according to the requirement of paragraph 6 of Accounting Standard (AS) 2 (revised),‘Valuation of Inventories’, the cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. They were further of the view that the value of crushed coal included in the inventories should also include all costs relating to MGR (where it exists), coal handling plants, etc.

    6. According to the querist, the company is of the view that the procedure followed by the company for valuation of coal stock is in compliance with paragraph 6 of AS 2 (revised). The company includes in the value of coal, the purchase price of coal, taxes and duties, cess, royalties, surface transportation charges at mine end, freight and handling charges up to the point of unloading, i.e., the track hopper at the power station end. Thus, the total cost of purchase of coal is taken into account. The movement of crushed coal from the track hopper to the stockyard is in the nature of shifting the material within the plant for storage and it will not be correct to add any cost on this account to the inventory.

    7. The company is further of the view that costs of conversion as stipulated in AS 2 (revised) are costs incurred in converting material into work-in-progress or finished goods. Coal for a power station is not a raw material, since no part of it is included in its finished product, i.e., electricity. It is a fuel used for generation of electricity and is thus in the nature of a consumable. Coal is crushed and then pulverised to facilitate its burning in the boiler. Neither any value addition in terms of calorific value is made to coal on crushing, nor is there any change in its net realisable value on account thereof. In view of this, it will not be appropriate to load other elements of overheads in the cost of inventory of coal. Such loading of overheads is more appropriate in valuation of work-in-progress in a process industry or manufacturing industry, where raw material undergoes value addition at successive stages before conversion into finished material.

    8. According to the querist, it is pertinent to mention that in the pricing mechanism governing the tariff for sale of energy, recovery towards fuel charges does not provide for any crushing costs or other overheads. In case costs relating to MGR (where it exists)/coal handling plant are allocated and included in the value of coal on the premise that these are costs of conversion, it would lead to overstatement of the value of coal because the net realisable value of the stock in the form of variable charges would be less than cost so calculated. This would be in direct contravention of AS 2. Further, recovery of depreciation and other overheads is made through fixed charges and is also on annual basis. If a part of these are allocated to the stocks of coal for valuation, it would lead to overstatement of profits in the first year and overstatement/ understatement in subsequent years. As per the querist, in order to avoid such a situation if the revenues are adjusted to that extent, it may contravene Accounting Standard (AS) 9, ‘Revenue Recognition’.

    B. Query

    9. The querist has sought the opinion of the Expert Advisory Committee on the issue whether in view of the facts and circumstances, the company should consider the costs relating to Merry-Go-Round System and coal handling plant for valuation of inventories of coal.

    D. Opinion

    17. On the basis of the above, the Committee is of the opinion that the company should include the costs relating to Merry-Go-Round system and coal handling plant for the purpose of determining the cost of inventories of coal at the coal stockyard.

    Opinion finalised by the Committee on 26.5.2001.

  2. #22
    Accounting Standards
    Guest

    Default Whether divisional headquarter expenses should form part of cost of inventories of Accounting Standard 2 - Valuation of Inventories - AS 2

    Whether divisional headquarter expenses should form part of cost of inventories of Accounting Standard 2 - Valuation of Inventories - AS 2
    A. Facts of the Case

    1. A public sector company is engaged in refining, transportation and sale of petroleum products. The company has various function-based divisions such as refineries, pipelines, marketing, etc. In respect of refineries, the company has a headquarter at Delhi to coordinate and control the operations of various refineries. The refineries headquarter functions are basically in the nature of production planning, working out crude oil requirements, monitoring of performance of the refineries on day-to-day basis, etc. The headquarter also acts as a coordinator for crude procurement, monthly production plans, monthly dispatch plans, etc., with other divisions such as pipelines, marketing, etc.

    2. The querist has stated that these functions essentially relate to the manufacturing and refining of the products and are only an extension of the functions at the refineries. Since the company has seven refineries, such functions have to be coordinated at a centralised place and hence the need for the headquarter. The querist has stated that the expenditure essentially pertains to manpower cost and overheads relating to manpower.

    B. Query

    3. The querist has sought the opinion of the Expert Advisory Committee on the issue whether the expenses of the refineries headquarter should be included for determination of the cost of inventory of finished products.

    D. Opinion
    On the basis of the above, the Committee is of the opinion that the expenditure incurred at the refineries headquarter should be included in the cost of inventories to the extent that such expenditure relates directly and clearly to bringing the inventories to their present location and condition. However, the general administrative overheads incurred at the refineries headquarter should not be included in the cost of inventories as they cannot be considered as relating to bringing the inventories to their present location and condition. Such overheads should be expensed in the year of incurrence.

    Opinion finalised by the Committee on 22.4.2000.

  3. #23
    Accounting Standards
    Guest

    Default Depreciation on capital spares of Accounting Standard 2 - Valuation of Inventories - AS 2

    Depreciation on capital spares Accounting Standard 2 - Valuation of Inventories - AS 2


    A. Facts of the Case

    1. A company is a Government of India undertaking incorporated in 1975 under the Companies Act, 1956. One of the objectives of the company is to set up thermal power plants at various geographical locations in the country and to supply bulk power to the various state electricity boards/succession entities.

    2. The company is registered under the Companies Act, 1956, and being an electricity generating company, is governed by the provisions of the Electricity Act, 2003. According to the querist, as the Government has not prescribed any format of statement of accounts for the central undertakings engaged in generation of electricity, the company is preparing its accounts in the format prescribed as per Schedule VI to the Companies Act, 1956. These accounting formats have been adopted since inception of the company and have been accepted by various audit agencies.


    3. The company has 13 coal based generating stations and 7 gas based generating stations located all over the country. Besides, the company is also setting up a hydro generation plant.


    4. According to the querist, in line with the provisions of Accounting Standard (AS) 2, ‘Valuation of Inventories’ (revised 1999), and Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India, the company has identified spares, which can be used only in connection with an item of fixed asset and whose use is expected to be irregular. These spares are classified as ‘capital spares’ and spares other than capital spares are classified as ‘inventories’. Capital spares identified by the company are capitalised at the time of their purchase along with the principal item of fixed asset or at the time of subsequent procurement. Depreciation on capital spares purchased along with the item of fixed asset is provided on a systematic basis over the period not exceeding the useful life of the concerned item of fixed asset. The depreciation on the capital spares identified/purchased subsequent to the capitalisation of the concerned items of fixed asset is provided systematically over the balance life of the concerned item of fixed asset. In both the situations, capital spares are amortised to the extent of 95% as required by section 205 and section 350 of the Companies Act, 1956.


    5. The querist has stated that a view has been expressed by the government auditor that the capital spares identified by the company and capitalised along with the concerned item of fixed asset should be amortised to the extent of 100% and not to the extent of 95%. The view is based on the provisions of paragraph 8.2 of AS 10 which, inter alia, provides that "Machinery spares are usually charged to the profit and loss statement as and when consumed. However, if such spares can be used only in connection with an item of fixed asset and their use is expected to be irregular, it may be appropriate to allocate the total cost on a systematic basis over a period not exceeding the useful life of the principal item" (emphasis supplied by the querist).


    6. The company has supported its view based on the provisions of section 205 and section 350 of the Companies Act, 1956. According to the querist, section 205 of the Companies Act, 1956, provides that depreciation shall be provided to the extent specified in section 350 or for any such amount as is arrived at by dividing 95% of the original cost of the asset. Accordingly, the company has been charging depreciation to the extent of 95% in respect of assets including capital spares.

    B . Query

    7. The querist has sought the opinion of the Expert Advisory Committee as to whether as per paragraph 8.2 of AS 10, ‘capital spares’ identified by the company, keeping in view the provisions of AS 2 (revised 1999) and AS 10, are to be depreciated to the extent of 100% over the balance useful life of the concerned item of fixed asset or to the extent of 95% as required by section 205 and section 350 of the Companies Act, 1956.

    D. Opinion

    On the basis of the above, the Committee is of the opinion that as per paragraph 8.2 of AS 10, capital spares identified by the company, keeping in view the provisions of AS 2 and AS 10, should be depreciated to the extent of 100% over the balance useful life of the concerned item of fixed asset and that this is in accordance with the requirements of section 205 and section 350 of the Companies Act, 1956.

    Opinion finalised by the Committee on 28.1.2005

  4. #24
    Accounting Standards
    Guest

    Default Inclusion of transportation cost in the cost of inventories lying in field godowns of Accounting Standard 2 - AS 2

    A. Facts of the Case

    1. A public sector company, registered under the Companies Act, 1956, is under the administrative control of the Ministry of Chemicals & Fertilisers with 97% of its share capital being held by the Government of India. The company’s turnover during the year 2001-2002 was Rs. 1200 crore.
    2. The company has three manufacturing divisions located at two different places in Kochi. The finished products are fertilisers and caprolactam (an industrial raw material). The company also has facilities to produce intermediate products required by it such as ammonia, sulphuric acid, phosphoric acid, anone, hyam sulphate, etc. The products are marketed by the marketing division of the company. Besides these, the company has an engineering and design division and an engineering works division also.
    3. The company produces two grades of nitrogenous fertilisers, viz., urea and ammonium sulphate and a complex fertiliser, viz., ammonium phosphate 20:20. These fertilisers are marketed in the four southern states of the country. The marketing in each of these states is under the control of an Area Office. Under each Area Office there are a few Regional Offices, each of which operates a few Agro Service Centres. The authorised dealers are supplied the fertilisers from these Agro Service Centres who, in turn, sell the same to the actual consumers/farmers.
    4. Fertilisers packed in 50 kg. HDPE bags are transported from the factory gate to the field godowns of various Agro Service Centres either by rail or by lorry at the cost of the company. There is no storage facility at the production site. The entire production of fertilisers is sold through the marketing outlets, viz., Agro Service Centres spread over the entire south India and nothing is sold directly at the factory gate. The selling price is the same for all the marketing territories regardless of the impact of transportation cost.
    5. According to the querist, for the purpose of arriving at the value of closing stock with the Agro Service Centres, the company has been including the primary freight incurred for the movement of the product from the plant to the field godowns. However, the secondary freight incurred between the field godown and dealers’ godown has not been included in the valuation of inventory as the same is considered to be a selling expense. The querist has held that this treatment is in line with Accounting Standard (AS) 2, ‘Valuation of Inventories’ (paragraph 6), which requires that "The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition". As per the querist, according to AS 2, the cost of inventory comprises not merely costs of production but also other costs, incurred even after production, for bringing the same to their present location and condition.
    6. The querist has stated that the statutory auditors have objected to the inclusion of the cost of transportation of the products to the field godowns from where the sales are effected, in the cost of inventories. The auditors have qualified the accounts stating that the valuation of stock of fertilisers is not in accordance with AS 2 because of inclusion of freight in the cost of inventories.
    7. The querist has forwarded the following comments of statutory auditors and the company’s reply to the same:

    Auditors’ comment
    "The valuation of closing stock of fertilisers is not in accordance with Accounting Standard 2, issued by the Institute of Chartered Accountants of India, because of inclusion of freight in the cost of inventories. (Profit overstated by Rs. 574.40 lakh)".

    Company’s reply
    "The comment is with reference to valuation of stock of Factamfos 20:20 at field warehouses. The Accounting Standard 2 has become mandatory with effect from 1-4-1999 and the company has not deviated from the practice. We are consistently following AS 2 with regard to valuation of inventories. As per paragraph 6 of Accounting Standard 2, "the cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition". Factamfos 20:20 is sold through company’s Agro Service Centres located at many places in all the southern states of Kerala, Tamilnadu, Karnataka and Andhra Pradesh. The company is not selling the product at factory gate. The freight incurred for movement of the product is the cost to be recognised for comparison of the net realisation at that stage. For the purpose of comparison of cost/net realisation at the point of field warehouses, the comparison of cost including freight with net realisation alone will give the correct picture. We also understand that some other fertiliser companies are also following the same method. This practice has been followed by the company consistently and is part of the company’s Accounting Policy Statement.In view of the above, the profit is not overstated as commented by the auditors."

    B . Query

    8. The querist has sought the opinion of the Expert Advisory Committee on the issue as to whether inclusion of freight in arriving at the cost of inventories held in field godowns of Agro Service Centres is in order


    D. Opinion

    On the basis of the above, the Committee is of the opinion that freight incurred for transportation of goods from factory to the field godowns of Agro Service Centres should be included in the cost for the purpose of valuation of inventories held in field godowns of Agro Service Centres.


    Opinion finalised by the Committee on 25.3.2003.

  5. #25
    Accounting Standards
    Guest

    Default Disclosure of plant and machinery retired from active use but still held for disposal of Accounting Standard 2 - AS 2

    Query


    1. A State Government Corporation is engaged in the manufacture of cotton and synthetic yarn. The corporation retired certain new machines from active use and held them for disposal. Depreciation was provided till the date of dismantle. The retired fixed assets were shown in the Schedule of Inventories under the head “Discarded Fixed Assets” at their realisable value. This fact was disclosed by way of a note in the Notes on Accounts.

    2. The querist has informed that the above treatment was given on the basis of Para 14.2 of Accounting Standard 10 “Accounting for Fixed Assets” which states that:

    “Items of Fixed Assets that have been retired from active use and are held for disposal are stated at the lower of their net book value and net realisable value and are shown separately in the financial statements. Any expected loss is recognised immediately in the Profit and Loss Account.”

    3. The querist has further informed that their auditors are of different view and are of the opinion that the assets should be either disclosed at the face of the balance sheet under the head “Discarded Fixed Assets” below net block or other current assets under the head “Current Assets Loans and Advances”.

    4. The querist has sought the opinion of the Expert Advisory Committee regarding proper disclosure and treatment of the above mentioned fixed assets in the financial statements


    Opinion February 8, 1995


    1. The Committee notes paragraph 6.1 of Accounting Standard (AS) 10 on ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India, which is reproduced below:

    “6.1 Fixed Asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business”.


    2. The Committee is of the view that the machines, first installed and later dismantled and now held for disposal, were procured for the purpose of producing goods. The retirement of these machines from active use does not alter their basic character.

    3. The Committee further notes paragraph 6.1 of Accounting Standard (AS) 2 on “Valuation of Inventories”, issued by the Institute of Chartered Accountants of India, which is reproduced below:



    “6.1 ‘Inventories’ means tangible property held

    (i) for sale in the ordinary course of business, or

    (ii) in the process of production for such sale, or

    (iii) for consumption in the production of goods or services for sale, including maintenance supplies and consumables other than machinery spares.”

    4. The Committee is of the view that disposal of fixed assets is not a sale in the ordinary course of business. Hence, the assets which are retired from active use cannot be classified as ‘Inventories’, even if they are held with the intention of sale.

    5. The Committee also notes paragraph 24 of Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India, as reproduced below:


    “24. Material items retired from active use and held for disposal should be stated at the lower of their net book value and net realisable value and shown separately in the financial statements.


    6. On the basis of the above, the Committee is of the opinion in respect of the issue raised by the querist in para 5 of the query that the machines, which are retired from active use and dismantled and are not actually sold off, should be disclosed appropriately at the lower of net realisable value and net book value in the Schedule of Fixed Assets or on the face of the balance sheet under the head Fixed Assets.

Tags for this Thread

Bookmarks

Posting Permissions

  • Register / Login to post new threads
  • Register / Login to post replies
  • Register / Login to post attachments
  • You may not edit your posts
  •