1.48 Query
Valuation of Closing Stock—2. A Public Sector Undertaking registered under the Companies Act is entrusted with the export of mineral ores and import on non-ferrous metals, industrial raw materials, fertilizers and diamonds. The Corporation has to maintain sufficient levels of inventory at all times which, at the end of the financial year, is physically verified and valued on the basis of the accepted principle of ‘cost or market price whichever is lower.’
In the case of mineral ores, export contracts are usually entered into on a long term basis extending for a period of one year or more. Except for all a small quantity, which is supplied to the local steel mills, the entire quantity of mineral ores is meant for export. For valuation of closing stocks of mineral ores at the end of the financial year, export sale prices are compared with the relevant FOB derived cost and the stocks are priced at the lower of the two viz. sale prices or the FOB cost/derived cost of stocks.
In the case of imports, the Corporation fixes quarterly sale prices (April-June, July-September, October-December and January-March) according to the guidelines issued by the Government from time to time on a cost-plus basis. The cost comprises CIF price paid to the overseas suppliers plus other expenses incurred by the Corporation towards Customs Duty, clearing and handling charges, port charges, godowns rent, etc. Since these stocks are kept in the godowns of the Corporation at different places like Calcutta, Bombay, Madras etc., and comprise consignments received at different prices, the Corporation, for the purpose of fixing the quarterly sale prices, works out the weighted average landed cost of each commodity in stock at the end of each quarter after taking into account the cost of consignments expected to be received during the quarter for which prices are to be fixed. In other words, the Corporation works out the weighted average cost of stocks in hand and incoming consignments and to this is added the prescribed margins and interest on blocked capital (on an average basis of 1.1/2 months) to arrive at the Corporation’s selling prices of different imported commodities. As a result of the Government policy, sales prices of certain commodities are also sometimes fixed even below cost. At the year end, the stocks of imported commodities are valued at the lower of the respective weighted average cost or its selling price applicable from the first day of the next financial year viz. price announced for April-June quarter.
The above policy of comparing the weighted average cost of stocks as on 31st March with the sale prices applicable from 1st April of the next financial year is being followed by the Corporation consistently over the years. The rationale behind this is that the Corporation normally holds stocks equivalent to three months sales and these stocks are expected to be sold over the next quarter. However, during the course of supplement Audit of Accounts for the year 1976-77, by the Director of Commercial Audit, a point was raised that for the purposes of comparison of cost with selling prices, the selling prices as applicable at the close of the year on 31st March should be taken into account and not those applicable from 1st April of the next financial year. The main contention of the Director of Commercial Audit was that the balance sheet presents position as on 31st March, consideration of selling price(s) other than that prevailing as on that date would go against the objectives of the balance sheet i.e. to indicate the financial position of a company on the date of balance sheet. The Corporation, however, does not subscribe to this view of the Director of Commercial Audit for the reasons already mentioned above. Though the Director of Commercial Audit has not qualified the accounts on this count, he has desired that the expert opinion may be obtained from the Institute of chartered Accountants in the matter.
Opinion June 12, 1978
The Expert Advisory Committee is of the opinion that the method followed by the Corporation is the correct method to be adopted according to the facts and circumstances of the case. The expression “Market Value” in this particular case is not voluntary but is the value realisable on the sale of goods at rates fixed by the Government for the following quarter.
The company might start disclosing the mode of valuation of stocks at “cost or realisable value whichever is lower” which would more appropriately disclose the mode of valuation. In this context, attention is invited to paragraph 5.12 of Chapter V of the Institute’s “Statement on Auditing Practices” reproduced below:
The net realisable value is the estimated selling price in the ordinary course of business less cost of completion and cost necessarily to be incurred in order to make the sale”. __________________________
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