1.17 Query
Valuation of inventories in tea industry.
1.This query is in reference to the opinion of the Expert Advisory Committee regarding the valuation of inventories in tea industry, published in the Institute’s Journal, ‘The Chartered Accountant’, (Volume XXXVII, No. 6 of December 1988). The Expert Advisory Committee had opined that ‘Plantation’, which is specifically stated to be outside the purview of Accounting Standard 2, covers only the stock of plucked green tea and it does not cover stock of ‘made-tea’. In view of this, Accounting Standard 2 will apply to ‘made-tea’.
2.The querist has informed that in tea industry, most of the manufactures have their own plantations and they obtain the raw material, i.e., the green tea leaves from their own gardens. So, in order to arrive at the cost of ‘made-tea’ (processed tea), the raw material cost, i.e., the cost of green tea leaves, has to be ascertained, which constitutes the major portion of the cost of ‘made-tea’. Since the raw material is not purchased, as is being done in most of the other manufacturing firms, the cost of raw material (i.e., green tea leaves) has to be ascertained, taking into account the cultivation expenditure. Further, tea being a perennial agricultural crop, there is no direct linear relationship between the input and the output. Again, as the yield of green tea leaves varies from time to time and year to year depending upon the natural factors, the cost of input also varies from period to period. So, in order to value the cost of green tea leaves (i.e., raw material) to the processed tea, an average cost for certain period, say a year, has to be adopted which will only be an arbitrary valuation. Further, it may not be possible to exactly value the cost of raw material component (i.e., green tea leaves) in the closing stock, as the raw material is received from various locations and its cost varies even between neighbouring estates due to climatic factors. If the average cost is taken for the entire yield, the cost arrived at will be only an approximation and not the correct one which will automatically influence the valuation of finished tea.
3.The querist has further informed that under the Tea Marketing Control Order, 1984, every manufacturer has to sell not less than 75% of the ‘made-tea’ through public auctions. Due to this Order, the tea market becomes a buyers’ market and the market price fluctuates widely and hence, the market price for a particular period can not be anticipated with reasonable accuracy.
4.The querist has argued that in view of the above facts adoption of Accounting Standard 2 in tea industry may not be practicable in the valuation of stock of ‘made-tea’.
5.Considering the limitations stated above, the querist has given following procedure for valuing the ‘made-tea’, which is followed by the querist’s company, for the consideration of the Expert Advisory Committee:
“Usually, there will be stock at two points, one at the factory and the other at warehouse. The stock of tea lying in the warehouse is meant for auction sale which can be clearly identified and sold immediately. For valuing the warehouse stock, the net value, which is realized after sale, is taken. For the valuation of stock at factory, an average price is arrived at based on the since-realised price obtained for the stock of tea at warehouse and after deducting the packing and distribution expenditure, such as packing, duty, transport, warehousing, etc., the net price is adopted. Since the tea is being sold immediately within a month of its process, the market price arrived at, based on the since-realised price is reasonably accurate. So, valuation of stock of tea in accordance with the above stated method will give reasonably accurate value and there may not be any over or under statement in the valuation of stock. Moreover, this method can be consistently followed for every accounting year.”
6. In support of the above treatment the querist has drawn an analogy between the valuation of tea and valuation of rubber, as described below:
“The latex (which has to be processed into concentrated latex or sheets within six hours from tapping), is similar to green tea leaves which have to be processed immediately, and is valued at since-realised price. The concentrated latex, i.e., cenex (shelf life 3 to 6 months) and smoked rubber sheets (shelf life about a year) which are similar to ‘made-tea’, are valued at since-realisable price. The only difference between these two is that ‘made-tea’ is end-product, whereas concentrated latex or smoked rubber sheet is raw material for rubber product manufacturing company. As both the plantation crops are similar in nature, why there is difference in valuation? Considering the true and fair exhibition in the accounts, the valuation of closing stock based on since realizable-value appears more reasonable.”
7.The querist has sought the opinion of the Expert Advisory Committee as to whether the above method of valuation followed by the company can be adopted without any prejudice to the standard accounting practice.
Opinion November 10, 1989
1.The Committee notes that paragraphs 2.38, 3.15 and 3.16 of the “Monograph On Accounting For Rubber Plantations”, issued by the Research Committee of the Institute of Chartered Accountants of India, state, inter alia:
“2.38 Rubber estates usually have their own processing units (factories) where latex as well as scrap (i.e., the latex that gets dried up on tapping panels and in collection cups) is processed to render it marketable……
3.15 The year end inventories in a rubber estate include, inter alia, the inventories of work-in-progress at the estate factory and the finished rubber products. (It may be mentioned that latex is a perishable item and is therefore transported to the estate factory for processing immediately after collection). The normal basis of inventory valuation viz., “the lower of historical cost and net realizable value” is not applicable in the case of these inventories because of the specific circumstances of the industry……
3.16….. The rubber produced in the estate factories is an industrial raw material and therefore, its demand as well as price may be estimated with reasonable accuracy.”
2.The Committee notes that the nature of tea industry is such that tea can be manufactured either by purchasing the plucked green tea leaves from the market or where the manufacturer has his own plantations, then from the plucked tealeaves from those plantations. The Committee is of the view that latex cannot be compared with the plucked green tea leaves as the former is not marketable. However, the processed latex can be compared with green tea leaves as both of them form raw material for the manufacture of rubber goods and ‘made-tea’ respectively.
3.The Committee is of the view that difficulties faced in determination of cost of the ‘plucked green tea’ can not be considered as an argument for following different basis of valuation of inventories of ‘made tea’ than that recommended in AS-2. The Committee, therefore, reiterates its earlier opinion that ‘Plantation’ which is specifically stated to be outside the purview of Accounting Standard – 2 covers only the stock of ‘plucked green tea’ and it does not cover stock of ‘made tea’ and hence, AS-2 will apply to ‘made tea’. In the opinion of the Committee, the method of valuation of inventories of ‘made tea’ followed by the company is not proper. The Committee has not considered the question of method of valuation of the ‘plucked green tea’ as this issue has not specifically been raised by the querist.
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