1.8  Query:    

        Valuation of inventories of waste products.

1. A government of India company is a manufacturer of sponge iron. The principal raw materials are iron ore, coal and limestone. Iron ore, coal and limestone are fed into an inclined rotary kiln, after crushing them to the required size, through belt conveyors. The coal is brunt initially with the help of oil. The oxygen in the iron ore is removed by reaction with carbon monoxide generated in the kiln. Thus, the removal of oxygen from the ore takes place in the kiln in this process and the finished product rich in metallic content is discharged from the kiln, which is called sponge iron.

2. The coal which is ignited inside the kiln is not completely burnt and about 25% of it comes out in the form of char. This char does not contain volatile matter and as such can not be used for recycling. Presently, the char thus produced is partially sold to brick manufacturers. The sales are not regular and are sporadic. 50% of the quantity generated remains unsold and dumped in the waste yard.

3. Similarly, the iron ore is purchased in lump form of about 100mm size. This ore is crushed to 20 mm size before feeding into the kiln. During crushing operations some fines of 6mm are generated which are dumped as waste. However, some quantity could be sold to cement plants as they use this along with other materials in cement manufacture. The balance quantity is left in the yard. The company is not able to sell the entire quantity and the stocks are pilled up in the yard years after years.

4.The statistics of actual generation and also sales realisation from sale of products and waste products are given in the Annexure. As per the amended sub-section 3(b) of section 209 of Companies Act, the books of account are to be kept on accrual basis. As per the present accounting practice adopted in the company, the current assets do not include the waste products like iron ore fines, char, etc., as they have no regular market. The sale proceeds are accounted for on cash basis.

5.The auditors of the company have objected to the present accounting practice adopted for these waste products. They advised that these should be accounted for at the current selling price. According to the querist, if this procedure is adopted which is applicable only to the products or by-products having a regular market, it would result in inflating the value of current assets to the extent of accumulated unsold quantities and the value of unsold quantity at the year end will have to be written-off by obtaining approval of the competent authority, in the books. Accordingly, it is felt by the company that the method of accounting prescribed in section 209(3)(b) is not applicable in respect of waste products as cited above.

ANNEXURE

STATEMENT SHOWING THE GENRATION/SALES IN RESPECT OF WASTE PRODUCTS AND MAIN PRODUCTS

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GENTATION /PR0DUCTION                         SALES

(in tonnes)

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WASTE PRODUCTS

MAIN PRODUCTS

6. The querist has sought the opinion of the Expert Advisory Committee on the propriety of the above mentioned accounting treatment.

                                                              Opinion                                                    May 28, 1991

1.The Committee notes that the company is accounting for sales of waste products on cash basis. The Committee is of the view that the sales of waste products should be accounted for on accrual basis, in view of section 209(3)(b) of the Companies Act.

2.The Committee notes that in the present query, the issue is relating to the valuation of stock of waste products. The Committee notes paragraph 29.4 of Accounting Standard (AS) 2 on ‘Valuation of Inventories’, issued by the Institute of Chartered Accountants of India, which states:

“Inventory of non-reusable waste or inventory of reusable waste for which facilities for reprocessing do not exist should be valued at net realisable value”.

3.The Committee also notes para 6.9 of AS 2 which defines ‘Net realisable value’ as the actual/estimated selling price in the ordinary course of business less cost of completion and cost necessarily to be incurred in order to make the sale.

4.The Committee is of the view that the company should make a reasonable estimate of the quantity of waste products expected to be sold in the ordinary course of business. The net realisable value in the ordinary course of business of the quantity expected to be saleable should be determined for the purposes of valuation of inventories of waste.

5.The Committee is accordingly of the opinion that the accounting policy followed by the company of ignoring the inventories of saleable waste altogether is not correct.

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