1.40 Query
Classification of Accounts under ‘Secured Loans’, ‘Unsecured Loans’ and ‘Sundry Creditors’.
A company purchased machinery from a foreign supplier. The aggregate cost of Rs.484 lakhs was accounted for as follows: Rs. (lakhs) 6 Direct cash payment.
73 Issued fully paid-up shares to foreign supplier.
227 Paid to the foreign supplier (through its government) by the World Bank from out of foreign currency loan earmarked for Industrial Credit and Investment Corporation of India Ltd. (ICICI).
108 Paid to the foreign supplier (through its government) by an international agency from the foreign currency loan earmarked for Industrial Finance Corporation of India Ltd. (IFCI).
70 Amount remaining unpaid at the time. This liability is being extinguished by remitting half-yearly instalments to the foreign supplier, in foreign currency, in accordance with a repayment schedule prepared beforehand. ----- 484 -----
The aggregate cost of the machinery was increased by Rs. 56 lakhs, as shown below: -
Rs. (lakhs) 7 Resulting from foreign exchange difference.
49 Being the escalation cost on account of the cost of labour and cost of raw materials. ------ 56 ------
This liability of Rs. 56 lakhs is also being extinguished by remitting half-yearly instalments to the foreign supplier in foreign currency, in accordance with a repayment schedule prepared beforehand. The company extinguishes its liability to the ICICI and IFCI by making half-yearly payments in Indian Rupees, in accordance with a repayment schedule prepared beforehand. These two financial institutions, in turn, remit in foreign currency, half-yearly instalments to the World Bank and the other international agency. If the company makes default in paying the instalments on due dates, or delays the payment, the two financial institutions are still obliged to remit the instalments to the two international agencies. Thus, out of the total cost of the machinery amounting to Rs. 540 lakhs, the unpaid balance of Rs. 461 lakhs appears in the annual Balance Sheet of the company as follows: - SECURED LOANS Rs. (lakhs) 227 --From ICICI. 108 --From IFCI. 70 --From the foreign supplier. (Under deferred payment credit, guaranteed with interest by IFCI to be jointly shared by IDBI) ----- 405 -----
The above loans and guarantees are secured by a joint equitable mortgage of the immovable properties and hypothecation of movable assets of the company, present and future (subject to prior charge in favour of the company’s banker for cash credit arrangement), created by the company in favour of ICICI, IFCI and IDBI. The above securities rank pari-passu inter-se between ICICI, IFCI, IDBI, and debenture trustees. UNSECURED LOANS Rs. (lakhs) 56 --From the foreign supplier (under additional deferred payment credit). In view of the statement of facts given above is it correct to show the liability of Rs. 56 lakhs as ‘Unsecured Loan from foreign supplier’ and Rs. 70 lakhs as ‘Secured Loan from foreign supplier’? Or the entire sum of Rs. 126 lakhs should be shown as ‘Sundry Creditors’ under ‘Current Liabilities and Provisions’?
Opinion September 17, 1977
In the view of the Committee, the amount of Rs. 126 lakhs (Rupees 70 lakhs plus 56 lakhs) need not be shown as loan. As mentioned in paragraph 9.15 of the “Statement on Auditing Practices” (1977) the net amount of Rs. 126 lakhs loan can be classified as long term liabilities and shown separately after unsecured loans with an appropriate description and the security provided should also be indicated. The instalments payable within 12 months of the date of the balance sheet may be separately indicated or shown as current liabilities. _________________________ |