1.49 Query: Accounting treatment of concessional rate of customs duty. 1. A public sector company is engaged in the manufacture of stainless steel plates, sheets and strips. It imports hot rolled coils (HRC) for cold rolling and manufacture of stainless steel plates, sheets and strips. Consequent to a customs Notification No. 84/90 dt. 20.03.1990, it is entitled to a concessional rate of duty on the imports if the imported materials is used in the manufacture of stainless steel plates, sheets or strips of a thickness of 1 mm or more. The conditions to be fulfilled for availing this concessional duty are as follows:
(a) The importer, at the time of import, undertakes to use the imported hot rolled stainless steel coils for cold rolling and manufacture of stainless steel plates, sheets, or strips of thickness of 1 mm or more;
(b) The importer executes a bond in such form and for such sum as may be specified by the Assistant Collector of Customs, undertaking to pay on demand, in respect of such quantity of hot rolled stainless steel coils as is not proved to have been used by the importer for the manufacture of stainless steel plates, sheets or strips of thickness of 1mm or more, an amount equal to the difference between the duty leviable on such quantity but for the exemption contained herein and that already paid at the time of importation; and
(c) The importer produces to the Assistant Collector of Customs within six months or such extended period as the said Assistant Collector of Customs may allow, a certificate issued by the Assistant Collector of Central Excise in whose jurisdiction the importer manufactures the aforesaid cold rolled products, that the imported goods have been used in the manufacture of cold rolled plates, sheets or strips of thickness of 1 mm or more and the said plates, sheets or strips have been cleared from the factory of production with a thickness of 1 mm or more.
2. In the final accounts, the company provides as liability the difference between the amount of bonds executed and those redeemed during the year. As and when the bonds are redeemed, the value is taken to ‘Customs Duty Relief Account’ and netted against ‘Raw Material Consumed Account’. However, the closing stock of finished goods which are of 1 mm thickness or more are valued taking into account the concession rate of duty.
3.The querist has referred the following issues for the opinion of the Expert Advisory Committee:
(a) Whether the company is right in providing for the difference between the normal rate of customs duty and concessional rate of customs duty for which bonds have been executed?
(b) Is the liability not in the nature of a contingent liability?
(c) In addition to (b) above, will it not suffice if a disclosure is made in the notes to the accounts about the fact that bonds have been executed for the difference in customs duty?
(d) If the company is not right in providing for the difference in duty, does the auditor need to qualify his report that the assets and liabilities are overstated?
(e) If the company is right, will it not distort the raw material consumption account because the production of items of thickness of 1 mm or more is not uniform every year and the credit to the raw material consumption account is taken in the year in which bonds are redeemed?
Opinion February 11, 1992
1. The Committee notes paragraph 6.3 of the Accounting Standard (AS) 2 on ‘Valuation of Inventories’, issued by the Institute of Chartered Accountants of India, which is reproduced below:
“6.3 ‘Cost of Purchase’ consists of the purchase price including duties and taxes, freight inwards and other expenditure directly attributable to acquisition, less trade discounts, rebates, duty drawbacks and subsidies, in the year in which they are accounted, whether immediate or deferred, in respect of such purchase.”
2. The Committee also notes paragraphs 3.1, 5.5, 9.2 and 10 of Accounting Standard (AS) 4 on ‘Contingencies and Events Occurring After the Balance Sheet Date’, issued by the Institute of Chartered Accountants of India, which state as under:
“3.1 A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be known or determined only on the occurrence, or non-occurrence, of one or more uncertain future events.
5.5 The existence and amount of guarantees, obligations arising from discounted bills of exchange and similar obligations undertaken by an enterprise are generally disclosed in financial statements by way of note, even though it is remote that a loss to the enterprise will occur.
9.2 If a contingent loss is not provided for, its nature and an estimate of its financial effect are generally disclosed by way of note unless the possibility of a loss is remote (other than the circumstances mentioned in paragraph 5.5). However, if a reliable estimate of the financial effect cannot be made, this fact is disclosed. The existence and nature of contingent gains are usually disclosed by way of note in financial statements if it is reasonably certain that the gain will be realised by the enterprise. It is important that the disclosure avoids giving misleading implications as to the likelihood of realisation.
10. The amount of a contingent loss should be provided for by a charge in the statement of profit and loss if:
(a) It is probable that at the date of the financial statements events subsequent thereto will confirm that (after taking into account any related probable recovery) an asset has been impaired or a liability has been incurred as at that date, and
(b) A reasonable estimate of the amount of the resulting loss can be made.”
3.The Committee further notes para 13 of AS 4, which prescribes that “Assets and liabilities should be adjusted for events occurring after the balance sheet that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date.”
4. The Committee is of the view that a contingency exists in respect of the bonds executed on the balance sheet date as the ultimate outcome will be determined on the future uncertain event, i.e., whether or not the company will utilise the imported materials for specified purpose within specified time.
5.The Committee is of the view that on the date of the finalisation of the financial statements, additional information would be available in respect of bonds existing on the balance sheet date that whether the relevant materials have been utilised for the specified purpose within the specified time. If, on that date, it is determined that certain materials were not so utilised, it is necessary to make a provision for the difference between normal rate of duty and the concessional rate of duty. In respect of the remaining materials, para 10 of AS 4 (reproduced in para 2 above) would be relevant. Thus, making of a provision for the said difference in the rates of duty would be necessary if it is probable, (keeping in view various factors such as the past experience of the company), that the events subsequent thereto will confirm that the company will not be able to manufacture the specified goods in specified time. Where a provision in this regard has been made, in accordance with the aforesaid views of the Committee, the same should be included in the cost of the closing stock. Where provision in this regard is not made, the existence of contingent liability for the amount of the difference in the rates of the duty should be disclosed in the financial statements, unless the possibility of the loss is remote.
6. The Committee is of the following opinion in respect of the issues raised in para 3 of the query:
(a) The company would be right in providing for the difference between the normal rate of customs duty and concessional rate of customs duty for which bonds have been executed, provided the provision is made as per para 5 above.
(b) & (c) Where it is not necessary to make a provision as per para 5 above, the disclosure should be made in the financial statements as a contingent liability in respect of the execution of bonds for the difference in the rates of the customs duty, quantifying the relevant amount.
(d) The auditor should qualify his report if the company has not followed the accounting treatment suggested above in (a), (b) and (c).
(e) If the company has made provision for the difference between the normal rate and the concessional rate of customs duty in accordance with the above suggested accounting treatment, the same should be included in the value of the closing stock. If in a subsequent year, the bonds are redeemed due to fulfillment of the obligation, then, in that year, the said difference should be reduced from the cost of raw materials consumed. However, if, the said difference was disclosed as a contingent liability, the question of reducing cost of raw materials consumed does not arise in the subsequent year. ______________________________ |