1.35 Query: Accounting for the effects of change in treatment of certain ‘current assets’ as ‘fixed assets’ retrospectively.
1. A company is a Government of India Undertaking under the Ministry of Communications. It undertakes projects mainly abroad in all the fields of telecommunications. The duration of the projects normally is one to three years. Since its inception is 1978, the capital assets which were purchased for execution of these projects abroad were being treated as current assets, because after the completion of the projects, these were to be disposed off, as normally these assets cannot be brought to India.
2. Till 1988-89, this treatment of capital assets was accepted by the statutory auditors as well as the Member, Audit Board (Office of CAG). However, after closure of accounts for the year 1988-89, it was advised to the querist that he should seek opinion of the Expert Advisory Committee of the Institute of Chartered Accountants of India, regarding treatment of these assets as current assets. The Expert Advisory Committee of the Institute, vide its earlier opinion, advised that the above assets should be treated as fixed assets and depreciation should be charged thereon. In consultation with the statutory auditors, it was finally decided that with effect from the accounts of the year 1989-90, the capital assets abroad for execution of the projects be treated as fixed assets and depreciation in accordance with the rates prescribed under Schedule XIV to the Companies Act be charged. Since the assets purchased prior to April, 1987, were charged off fully, it was agreed that the above treatment be made for assets purchased on or after 1st April, 1987. It may be mentioned that in earlier years when the company was treating these assets as current assets, it was charging depreciation in the form of taking only the residual value of the assets at the close of the year. Accordingly, on adoption of the above policy, depreciation, since purchase of assets, was worked out as per Schedule XIV to the Companies Act. The excess depreciation charged in the earlier years was directly transferred to general reserve instead of routing it through the profit and loss account. This was duly disclosed by way of a note which is reproduced below:
“(a) Depreciation on fixed assets has been charged as per para 6 of the Statement of Accounting Policies and Practices. Till last year, fixed assets of foreign projects were being charged directly to project expenditure and residual value of such assets was being taken as ‘work in progress’ and shown under the head ‘Other Current Assets’ as capital assets. The residual value of such assets was taken in the first year at 67 per cent, second year at 34 per cent and third year onwards one unit of the relevant currency at notional value. The translation of such assets was being done at the closing rate. The assets are now being treated as fixed assets.
(b) The gross/net block of fixed assets abroad includes assets purchased prior to 1.4.87 at notional value of one unit of the relevant foreign currency, the assets having been charged off fully in earlier years.
(c) The change in policy has resulted in increase in profit by Rs. 2,55,06,625.
(d) The effect in respect of earlier years (April, 1987 to March, 1989) amounting to Rs. 3,34,94,704 has been transferred to General Reserve directly.”
The accounting policy at para 6 referred to above is as under:
‘On straight line method at the rates and basis provided in Schedule XIV of the Companies Act, 1956.’
3. The statutory auditors and the Office of the CAG, though accepted the accounts of 1989-90 without comment, but advised that the opinion of the Institute be sought as to whether the above treatment is in order and, if not, i.e., if the amount should have been transferred to general reserve through profit and loss account in 1989-90, what treatment should be given in the accounts of the year 1990-91? Though the company had mentioned to the auditors that ultimately the amount was to go to general reserve, no adjustment is necessary in 1990-91 even if the amount was to be brought through profit and loss account but auditors have desired that the opinion of the Expert Advisory Committee of the Institute of Chartered Accountants of India be sought on the matter.
Opinion October 28, 1991
1.The Committee notes that the company was incorrectly treating certain assets of the nature of fixed assets as current assets and was charging 33% of their cost to project expenditure account. Had the company correctly treated these assets as fixed assets, it would have provided depreciation on these assets in respect of the past years according to the then relevant provisions of the Companies Act and the relevant circulars issued in this regard by the Department of Company Affairs. The correct accounting treatment will be to treat such existing assets as fixed assets from the date they were purchased and provide depreciation as aforesaid.
2. The Committee is of the view that on account of adoption of correct accounting treatment, the difference between the following amounts has to be provided for in the accounts of the year in which the correct accounting treatment is adopted:
(i) Cost of such existing assets charged off to the project expenditure account.
(ii) Depreciation of such assets for the past years according to the then relevant provisions of the Companies Act and the circulars issued by the Department of Company Affairs.
The Committee is also of the view that the said difference should be routed through the profit and loss account and should be disclosed separately in the statement of profit and loss account together with its nature and amount in a manner that its impact on the current profit or loss can be perceived.
3.The Committee is accordingly of the opinion that the company should not have transferred the difference referred to in para 2 above directly to the general reserve but should have routed it through the profit and loss account. Since this has not been done, the company should transfer in the current year, i.e., 1990-91, the said difference from general reserve to profit and loss account and the same should be separately disclosed in the current statement of profit and loss together with its nature and amount in a manner that its impact on current profit or loss can be perceived. This treatment is recommended on the basis that a reversal of an item of debit/credit in Profit & Loss Account should be made through the Profit & Loss Account as it would enable the financial analysts/readers to appreciate the profitability of the company over a period of years.
4.The Committee is also of the view that the company should also implement the correct accounting treatment referred to in para 1 above in respect of the existing assets purchased prior to 1st April, 1987. ______________________________ |