1.25 Query: Valuation of inventories of cotton bales, seeds etc.
1. A Government company is engaged in buying and selling of cotton, both in local as well as international trade. The company also deals in cotton seeds, lint and unginned cotton (kapas). The query relates to the method of valuation of inventories of cotton bales and seeds.
2. The method of valuation adopted consistently by the company for the past ten years is as under:
3. The method followed as above has been elaborated in the statement of accounting policies annexed to the accounts for the year ended 31st March, 1990, which is reproduced hereunder:
“Valuation of Closing Stock
i) The stocks of lint and seeds are valued at Market/Realisable Value. The stocks whenever contracted and approved are valued at such contracted rates in case of export contracts and other stocks at Market Price at the close of the year. Accounting Standard-2 regarding valuation of inventories prescribed by the Institute of Chartered Accountants of India, is not applicable for valuation of inventories of plantation, forestry, agricultural commodities and live stocks. Cotton being an agricultural commodity, in the opinion of the Board, Accounting Standard –2 is not applicable for valuation of cotton and the aforesaid method being the trade practice, the Corporation is consistently valuing the closing stocks of bales, lint etc. at contracted/market price.
ii) The stocks of raw materials are valued at average cost- the same being calculated quality-wise and centre-wise.
iii) The stock of Yellow Pickings and sample bales are valued at Realisable Value.”
4. In view of the doubts expressed by the Government Auditors about the acceptability of the valuation of lint and seeds at market/realisable value, the company made enquiries with some other organisations engaged in similar activities about the method of inventory valuation followed by them. It was noted that some other large state marketing federations and association of cotton growers also follows the same method as the one followed by the company. It may be noted that the company’s statutory auditors as also the Government Auditors have not made any adverse remark or qualification in their respective reports on the accounts of the company on the method of valuation of inventories.
5. Para 5 of the Accounting Standard (AS) 2 on Valuation of Inventories, reads as under:
“5. This Statement applies to valuation of all inventories except inventories of the following to which special considerations apply:
(i) Plantations, forestry, agricultural commodities and livestock;
………………
………………”
(emphasis supplied by the querist)
Although, in the view of the querist, the above Accounting Standard does not apply to valuation of cotton seeds and lint, being agricultural commodities, the question still remains as to whether the company is right and justified in valuing these stocks at market/realisable value. The querist company’s management expects that this question will have to be faced and satisfactorily answered while compiling the accounts for the current year, viz., the year ending 31st March, 1991.
6. The querist would like to know from the Expert Advisory Committee various special considerations which could be said to apply to valuation of stocks of agricultural commodities such as cotton seeds and lint which justify the method of valuation followed by the company as explained above or, in other words, what are the precise considerations for not valuing the stocks of agricultural commodities at lower of cost or net realisable value which is the general principle for valuing the closing stock?
Opinion April 1, 1991 1. The Committee is of the view that keeping in view the context of the expression “agricultural commodities” as used in para 5 of Accounting Standard (AS) 2 on ‘Valuation of Inventories’, issued by the Institute of Chartered Accountants of India [relevant extracts of which are reproduced in para 5 of the query] only those agricultural commodities are exempted from the application of the standard, which arise from the agricultural crops. For example, produce of cotton from the harvesting of the cotton crop. In the present case, the company is a trading company which purchases and sells cotton bales, seeds, lint etc.
2. The Committee is accordingly of the opinion that in the facts and circumstances of the query, cotton seeds, lint etc., are not exempted from the application of AS 2. ________________________________ |