Treatment of value of sales in the accounts due to variation in

the chemical analysis of iron ore concentrate and pellets

between loading port and discharge port.

1.A company is exporting iron ore concentrate and pellets to various countries and as per the contract concluded with different countries, the sales are invoiced provisionally based on the chemical analysis, mainly ferrous content, at the loading port. As per the contract, the chemical analysis is done at the discharge port also and the final bills are raised based on the mean (average) of the analysis of loading port and discharge port. In some cases, the contract provides for raising final invoices based on discharge port analysis only. Wherever the discharge port analysis are received within the financial year or before the cut off date for closing of accounts, necessary corrections are carried out in the sales figures. For the shipments that are made for which discharge port analysis are not received, a note is appended to in the annual accounts as indicated below: -

“In respect of shipments of iron ore concentrate/pellets for which discharge port analysis has not been received, sale is based on the loading port analysis.”

2.Any variation due to quality, quantity, and moisture are adjusted, while raising the final bills, on receipt of discharge port analysis, in the subsequent years. The corrections are carried out in the sales of the year in which discharge port analysis is received. In other words, sales are estimated based on the analysis done at the loading port wherever discharge port analysis are not available. Any correction in the estimates is done when the information regarding analysis is available. As no error or omission is involved, it is adjusted in the year in which the final analysis is received.

3.The querist has sought the opinion of the Expert Advisory Committee as to whether the treatment carried out in the sales of the subsequent period is in accordance with the generally accepted accounting principles. If not, the treatment that should given to the variation may be suggested by the Committee.

Opinion July 10, 1990

1.The Committee notes paragraphs 9, 10 and 11 of Accounting Standard (AS) 9 on ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India, which recommend as below:

9. Effect of Uncertainties on Revenue Recognition

9.1 Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection.

9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc. revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale or rendering of service even though payments are made by instalments.

9.3 When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded.

9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use by others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed.

9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognised.

10. Revenue from sales or service transactions should be recognized when the requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection, if at the time of raising any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed.

11. In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled:

(i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and

(ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods

2. The Committee notes that in the present query, there are two basic issues involved, namely:

(i) Timing of revenue recognition, i.e., whether the revenue from sales can be recognised before the discharge port analysis is received, and

(ii) If it can be recognised, then at what amount the sales should be originally recorded.

3.The Committee notes that in the present case the sales are invoiced provisionally on the basis of chemical analysis done at loading port. Final bills are raised when the discharge port analysis are received. The final bills are based on the average of the analysis done at loading port and discharge port or on the basis of discharge port analysis only, as the case may be. The Committee is of the view that revenue from sales can be recognised before the discharge port analysis is received if:

(i) an estimate of the likely variations in the sales price (on account of variation in chemical analysis done at loading port and discharge port) can be made within reasonable limits at the time of booking of sales so that no significant uncertainty exists regarding the amount of consideration that will be derived form the sale of goods. In the view of the Committee, such an estimate may be made taking into account the relevant factors such as scientific and technical basis, past experience, etc. The revenue recognition should be postponed in case the above conditions are not fulfilled.

(ii) the conditions specified in paragraphs 10 and 11 (i) of Accounting Standard (AS) 9 are fulfilled at the time of booking of sales.

4.The Committee is of the view that where sales have been booked in accordance with para 3 above:

(i) The sales figure would be originally recorded on the basis of chemical analysis done at loading port.

(ii) The sales figure at (i) above would be adjusted in case the discharge port analysis are received before the date of finalisation of accounts. The adjustment would relate to the variation in sales recorded at (i) above.

(iii) Where the discharge port analysis are not received up to the date of finalisation of accounts, the sales figure at (i) above should not be adjusted. However, a provision should be made for estimated loss, if any, which may occur due to the variation in chemical analysis at the discharge port. No provision should be made for anticipated gain, if any, keeping in view the concept of prudence.

5. The Committee is, therefore, of the opinion that the company should recognise sales only if the conditions specified in para 3 above are fulfilled. The sales should be booked and adjusted as per para 4 above. Where the discharge port analysis is not received upto the date of finalisation of accounts, a provision should be made for estimated loss, if any, which may occur due to the variation in chemical analysis at the discharge port.

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